Nextracker Looks Well-Positioned for Boost From Strong Macro Trends

By Larry Ramer

Nextracker (Nasdaq:NXT), which produces trackers for utility-scale solar-energy projects, has multiple positive potential catalysts and it is growing significantly. Moreover, the shares have a low, attractive valuation. In light of these points, I view NXT stock as a buy for some growth investors.

Nextracker has a nine-year track record as a global market leader in solar tracker solutions for utility-scale trackers based on gigawatts shipped, according to Wood Mackenzie. And it’s clear that utility-scale solar is poised for significant growth.

The firm reported that 7.6 gigawatts of utility-scale solar were installed in America in the second quarter of 2024, representing a 59% jump versus the same period a year earlier. And the firm estimates that more than 186 gigawatts of such projects will be added in the U.S. through 2029.

CNBC in June reported that "Solar is booming in the United States as power demand surges, outpacing the growth of any other electricity source." The allure of renewable energy for power producers, Andrés Gluski, CEO of power company AES Corporation (NYSE:AES), said it is " cheaper, they are clean and quite frankly easier to site, so the future is going to be renewable energy.”

Looking at the challenge of the booming data center segment, which needs electricity solutions to power AI, McKinsey wrote that "the bulk of new clean generation is expected to come from solar and onshore wind." Since many huge tech companies that are building a large number of data centers have energy sustainability goals related to carbon emissions, solar is likely to power many new data centers.

Congress and the Fed Could Help Nextracker

One factor weighing on Nextracker's growth is the increase in the amount of time needed for solar projects to obtain permits and connect to electrical grids. Indeed, the company reported on its last earnings call that 20% of its backlog would not be converted to revenue for over two years.

Management blamed that situation on longer sales cycles. And it attributed the latter situation to the increased amount of time needed for the owners of solar projects to obtain permits and connect to the grid.

Fortunately for Nextracker and NXT stock investors, Congress looks poised to greatly improve this situation.

Specifically, a bill that would significantly speed up the permitting process for energy projects passed the Senate Energy and Natural Resources Committee by a bipartisan 15-4 vote in July. The lopsided vote bodes well for the legislation's chances of being passed by Congress this year or in 2025. The bill would reduce the amount of time that entities have to sue over energy projects to 150 days from six years currently, and federal agencies would have to act on such projects when instructed to do so by a court within six months.

Agencies currently have no deadline to act on these matters.  The bill also sets various timelines " for renewable projects requiring a right-of-way on federal land." Finally, the legislation may make it easier for solar projects to connect to the grid by accelerating the process needed to obtain permits for interregional transmission lines. 

Meanwhile, the Fed's rate cuts will also help Nextracker. That's because lower rates are expected to boost the number of solar projects, with developers exploiting reduced borrowing costs to revive projects that had been stalled.  

Nextracker's Top and Bottom Lines Are Growing Rapidly

In the company's first quarter (June), its revenue jumped to $720 million versus $480 million during the same period a year earlier. Even more impressive, its earnings per share nearly doubled year-over-year to 84 cents from 43 cents and its adjusted EBITDA margin advanced to 24.3% from 17.4%.    

The company also has a very healthy balance sheet, with $471.9 million of cash and short-term investments at the end of Q1, along with only $142 million of long-term debt and $4.7 million of current debt.

Valuation and Risks

NXT stock has a forward price-to-earnings multiple of 12.8x, well below the sector median of 22.6x. What's more, its forward PEG ratio of 0.64 is well below the sector median of 1.9. Finally, its forward EV/EBIT ratio of 8.3 is much lower than the sector median of 16.7.  

On the risk front, after the Biden administration approved preliminary new tariffs on four Southeast Asian countries that export a large number of solar panels, the developers of U.S. utility-scale projects may have trouble obtaining a sufficient number of panels in the longer term. That could prevent some such developers from building their projects, resulting in many fewer orders for Nextracker's offerings.

If President Donald Trump is reelected, tax breaks on solar projects may be repealed. The latter development could reduce the number of such projects deployed, lowering the demand for NXT's trackers.

The Fed could stop lowering interest rates or could even raise them. Such a development would make solar projects more expensive, causing some of the initiatives to be put on hold and lowering the demand for NXT's trackers.

Finally, Congress may not pass permitting reform. As a result,  the delay in the permits for and the connection of solar projects could be exacerbated. Such a development, in turn, would likely reduce the demand for NXT's trackers. 

The Bottom Line on NXT

NXT is facing significant risks. Nonetheless, the company's ability to benefit from strong macro trends, its strong growth, and its low valuation make it a buy for risk-tolerant growth investors.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.