FTCI - FTC Solar: There's Too Much Uncertainty Here

Summary

• Revenues for FTC Solar have not seen a steady increase, despite a much higher demand for solar modules compared to years before. One of many arguments for a bear case.
• Revenues decreased 69% YoY despite a larger-than-ever demand for renewable energy sources.
• With the blame being put on regularity issues for customers, I feel the last earnings report isn't showing the whole picture of the situation FTC Solar is in currently.
• On top of diluting shares at a rapid pace, the investment thesis for FTC Solar doesn't seem to be there, and putting any money to work here would be very risky. I would look to other opportunities instead.

FTC Solar ( FTCI ) is a solar company with a market cap of just over $270 million. Operating in a sector poised for many years of growth, they offer customers with a solar tracking system. With most revenues coming from sales in the US, they also have an international presence with sales spread out.

The product is meant to further make solar effective as they estimate their system to increase energy generated around 17% compared to traditional solar modules. With what seems like a bright future, the buy case now is hard to make as share dilution runs wild and revenues seems to stagnate. This forces me to say that investors might want to consider selling and finding better opportunities.

Large Decrease In Revenue

With revenues going down 69% YoY you have to really scratch your head how you manage to make that happen in a world where solar products have never seen such high demand. In the latest earnings report FTC Solar concluded they had generated $16.5 million in revenues, compared to $52 million last year.

With the gross margins seen just as steep of a decline. In Q3 the gross margins came in at -57.4%. Last year might have been an off year for companies to grow when money was cheap to borrow. But I don't think that's reason enough to justify why FTCI has gone from -15.2% to -57.4% gross margins in just under 12 months. This should be enough to scare any potential investor away from the company.

In the latest earnings report we got a comment on the reason for lower revenues, "customers continue to struggle to obtain imported solar modules amid ULFPA-related reviews". I would hope that the company can grow and learn from this that such a large portion of their revenues can't be altered by reviews and struggling imports. Building a good inventory is key to hedge against these issues.

FTC Solar provides customers with something called a Solartracker. This is meant to boost the potential energy that solar panels could generate. They are used, just like the name suggests, to track the sun and give solar panels more exposure during the day. In their investors presentation they provide that their product helps boost energy generated by 25% and reduces cost of energy by 17%.

Market Outlook

With the entire solar market expected to grow rapidly for the next few years, FTC Solar wants to be a part of this new wave of green energy. With the market expected to grow 8.4% in the US until 2050 there is a large amount of capital that will flood into this space. With more and more residential and commercial demand.

With a market poised for so much growth there will need to be a lot of capital used by companies too to get a foothold and their market share. It's a costly endeavor to start out with. What I think could be worrying is the level of low margins some of the beginners in the space have, like FTC Solar.

Since solar panels are a fairly straightforward product and one that can be streamlined and vertically integrated in the business, I would expect margins to start moving higher eventually. But before that can happen a company needs to have a good market share and a strong customer base. Luckily it seems FTC Solar has been able to capitalize a little bit on solar demand, with almost $1 billion in backlog orders.

Company Financials

Looking at the financials, FTC Solar holds just under $50 million in cash, compared to barely any debt. A healthy state to be in right now in my opinion. I actually think the balance sheet might be one of the positives for the company. With barely any debt they have the possibility to perhaps borrow a little bit more to help finance expansion. But I would hope they keep it moderate in case they ever need to pay it off.

The cashflow is growing steadily towards being positive which is a good sign. It's rare to find young companies like this which already working heavily towards having a good amount of free cash flow. Normally that is something they mature into as they get the streamlined and have more control of expenses.

In terms of shares outstanding it has me a little bit worried. From 2020 until 2022 they have increased by 44.6%. Companies often do this to raise capital for expansion and growth, which makes it very difficult to be an investor in the early days of the company as your portion might get extremely diluted. The reason it has me worried is that I don't see any sign of them slowing down soon. With negative cash flows still I would expect this dilution to continue for several more years until FTC Solar gets more of a grip of their business.

Valuing FTC Solar

Whenever a company has negative net income it can really be anyone's guess when they are worth investing in. I have a hard time putting my money into anything which has not proven profitability yet. It brings uncertainty which is the enemy of value investing. But if they can get a control of their top line and grow it according to the market's expected CAGR, FTC Solar might be interesting in the future.

When I look at companies that have a negative EPS currently and not because of some issues they can't control, then I like to be very conservative with my estimates. I do think that FTC Solar has managed to have a very healthy balance sheet throughout the last quarter, and that makes the future valuations a little bit more optimistic.

The management blamed issues such as reviews and imports for their decrease in revenues in the last quarter. I believe they will eventually resolve these problems and become more profitable once again. With that I would also expect that in the next years they start slowing down diluting shares and focus on bringing value to shareholders. They have a large TAM which increases each year, the challenge will be to secure more and more customers. But in the long-term I have faith they will manage to do so.

At the current price $2.55 per share you would make around a 9.8% return for the next 5 years, not that appealing to me. One could argue that the multiple I have set for them is too conservative, but with smaller companies I find this will help reduce any potential downside risk to an investment. The only issue I have with assuming these numbers is the management team's ability to turn profitable. They have a history of volatility gross margins and I hope this doesn't continue.

Conclusion

FTC Solar has an exciting solar product where they offer the ability for customers to generate more energy than the more traditionally made panels. The worry and uncertainty around the company comes from the lack of ability they have had in generating revenue from this when every other company is blowing past forecasts.

The solar industry has a bright future ahead and expects to grow around 8.4% until 2050. It's now up to FTC Solar to be a part of this growth and establish themselves as a company offering a great product.

All in all I have a hard time investing in this company. The investment thesis is about the management pulling the company up and into profitability. But with extremely volatile gross margins recently I don't feel comfortable investing my money into the company. On top of this I think the current share price seems to be trading at a premium and the downside risk could be large. Investors are better off selling and finding other opportunities instead.

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