Nextpower

Nextpower reported revenue of $935 million, up 8% year on year. Adjusted gross margin rose 360 basis points to 36.6%. The company also acquired the Prevalon energy storage business, Apex Power, and key assets of Zigor's inverter business, while announcing it will acquire Zimmerman PV-Steel.

Why it matters: Nextpower has been shifting away from its core tracker business toward becoming an energy technology platform that can serve a wide array of customers, from utility-scale solar to energy storage to AI data centers, so it's not surprising it continues to make M&A moves. Until recently, the market was baking in a lot of upside, as the lion's share of Nextpower's business remains solar tracking, even with a record backlog of $5.5 billion. Energy storage accounts for $300 million in added backlog, giving the firm multiyear visibility. But even as management's targets from its November capital markets day look stale to the upside, we think the market's already looking past these figures. Still, we're concerned about how long the company can maintain this margin level given its dependence on tax credits and the risk of M&A execution.

The bottom line: We raise our fair value estimate to $70 from $64 for no-moat Nextpower as we lift our medium-term sales forecast based on backlog visibility. Still, the stock remains overvalued, having fallen back into 2-star territory. We retain our Standard Capital Allocation Rating. The market's giving management a lot of credit for the company's strategic pivot. While it's repeatedly surpassed targets, we think M&A execution risk and long-term margin normalization once tax credits go away are underappreciated by the market. Even as we're skeptical of the company's pivot, we think it's a thesis worth watching as Nextpower continues to win orders and at what price. If Nextpower can capture greater wallet share for every utility project it bids on without trading margin, its moves could rerate the stock higher.

Following the first-quarter fiscal earnings, we raise our fair value estimate for Nextpower to $70 from $64 previously, as we lift our medium-term sales forecast based on the visibility provided by the backlog.

Our forecast is predicated on the US solar market growing in the high single digits per year through the end of the decade. We estimate that Nextpower's market share remains roughly consistent during our forecast period. Nontracker revenue is expected to grow from zero in fiscal 2024 to over a third of total revenue by fiscal 2030. We expect average selling prices to remain roughly flat over our forecast period.

We forecast GAAP gross margins to decline to the low- to mid-20s late in the decade. Additionally, we forecast adjusted EBITDA margins declining to the midteens through our 10-year forecast period.

We assign Nextpower a no-moat rating.

Nextpower's flagship product, NX Horizon, is an independent row solar tracking solution. In addition, the company offers an integrated software solution, TrueCapture, to optimize its tracking solutions by serving as the brains of the connected system.

Tracking systems have been increasingly commercialized, specifically in domestic markets like the US and Australia, enhancing energy yields across a solar project. Historically, solar projects were developed utilizing a fixed tilt system, where each panel is set in a stationary position. Tracking systems increase energy yields by continuously moving and optimizing the position of each solar panel row or group of rows in direct positioning with the sun. The additional upfront capital spending to install a tracking system, often 10%-15% of the total project cost, is made up for in the long run by enhancing energy yields. Similarly, Nextpower’s value proposition is that its products, while at a marginal pricing premium to its competitors, offers the best energy yield enhancement and ultimately the lowest levelized cost of electricity among its peers.

Nextpower’s hallmark is its independent row solar tracking solution, where each row is powered by a single motor and independent of the next, allowing for maximized yields across the fleet. Competing tracking systems are linked rows, where one motor controls multiple rows of solar panels, such as Array Technologies’ offering. Although optimized positioning would be relatively consistent for such a section, challenges such as blind spots arise under certain positioning with the sun. By allowing each solar panel row to move independently, they can be positioned to still capture adequate sunlight, remain congruent without blind spots, and maximize yield for the whole fleet. Additional benefits include different product offerings designed for imperfect landscapes or challenging terrains. Despite Nextpower’s independent row technology we don’t think it benefits from an intangible assets advantage.

Nextpower boasts a portfolio of over 400 patents which are predominately allocated toward its tracking hardware systems. However, we don’t view solar tracking systems as incredibly technical products. For example, Nextpower’s spending on research and development is approximately 3% of sales, in line with much of the broader solar industry.

While the technical construction of its tracking systems may not be repeatable, similar strategies—whether a new single row development or 2P (a side-by-side solar panel structure)—have been developed at competing firms. For example, competitor Gamechange Solar offers an independent-row tracking system that directly competes with Nextpower, limiting its intangible asset advantage, in our view.

We think another limiting factor of Nextpower’s current moat it its customer mix. Approximately 25% of its customers are owners or developers, which are the long-term owners of a solar project. Alternatively, 75% of the firm’s business is derived from engineering, procurement, and construction firms. We view Nextpower’s business with developers as moaty, but its EPC relations are cost-driven and weigh on Nextpower’s ability to develop customer relationships. Developers/owners are committed to a project’s long-term returns and are willing to incur a higher upfront capital expenditures bill to develop a solar project if it is accretive to its return profile, which is Nextpower’s value proposition. Nextpower’s single-row technology offers true panel independence, often leading to the best energy yield enhancement in the industry.

Alternatively, EPCs have a different approach. EPCs are hired by a developer to construct the site, managing the construction process. EPCs have an incentive to control costs to secure developers’ business but lack ongoing interest in a project’s performance. As such, EPCs are incredibly cost conscience around their budget when managing a project. Nextpower’s value propositions, which are enhanced energy yields and a high-quality product, are not aligned with EPCs' priorities. Developer relations are stronger and are naturally stickier, but only account for 25% of sales.

Again, we view Nextpower’s product suite as high-quality respective to its growing industry. Their IP may not be directly replicated, but similar strategies—whether single-row or 2P systems—likely will be. Additionally, Nextpower’s main customer base, EPCs, exhibit sharply lower customer stickiness in comparison to owners/developers. Trackers are a relatively new technology with only a few major players in the US (Nextpower and Array account for about 70% market share). Robust economics will inevitably be competed away in the long term, as pricing will remain a key consideration and technological differentiation is not high enough to warrant a moat.

Nextpower's best-in-class independent row tracker system, aligns its optimized energy yields with developer’s long-term project economics.

Nextpower serves a growing utility-scale solar market, with a leading position in both developed and higher-growth emerging markets.

Nextpower's expansion beyond solar trackers could drive material revenue growth.

Cost-sensitive EPCs, which account for 75% of Nextpower's customers, exhibit limited stickiness with tracker companies.

Nextpower's robust profitability today could prove difficult to maintain over the long-term absence of a moat.

Nextpower's international expansion may face challenges given a more fragmented landscape in many non-US markets.