SHLS - Shoals Technologies: The Valuation Is Way Too High

2023-03-09 05:59:00 ET

Summary

• Shoals Technologies posted its FY22 and Q4 FY22 results.
• Their revenue and net income grew significantly in FY22.
• When compared to its peers, it is overvalued.
• I assign a hold rating on SHLS stock.

Shoals Technologies ( SHLS ) offers an electrical balance of services and solutions, and components for solar and electric vehicle charging applications in the United States. They produce an electrical balance of system (EBOS) components, including inline fuses, disconnects, wireless monitoring systems, transition enclosures, and wire management solutions. They primarily offer their goods to engineering and construction companies that carry out solar energy project construction. They recently posted their FY22 and Q4 FY22 results. In this report, I will analyze its financial performance and discuss its future growth potential. In my opinion, their growth trajectory looks solid, but they are overvalued compared to industry standards. So, I believe we might see a big correction in the stock in the coming times. Hence, I assign a hold rating on SHLS.

Financial Analysis

SHLS recently posted its Q4 FY22 and FY22 results. The reported revenue for FY22 was $326.9 million, a rise of 53.3% compared to FY21. I think the primary cause of the increase was the year-round increase in demand for EV and solar products. The net income for FY22 was $143 million compared to a net income of $3.9 million in FY21. I believe that greater leverage on fixed costs and a larger percentage of revenue from System Solutions were the primary causes of the increase. The gross profit margin in FY22 also increased to 40.1%, which was 38.7% in FY21.

The revenue for Q4 FY22 was $94.6 million, a rise of 97% compared to Q4 FY21. I think that higher sales volumes brought about by increased demand for its solar EBOS solution products and system solutions contributed most to the increase. Their system solutions revenue grew by 150% year-over-year. The net income for Q4 FY22 was $118.3 million, compared to a net loss of $2.1 million in Q4 FY21. I think the $110.9 million non-cash gain they recorded in the quarter in conjunction with the termination of the tax receivable agreement had a substantial positive impact on net income. I believe higher income from operations was also a primary reason for the rise. In my opinion, SHLS's financial performance in FY22 was quite impressive, as its revenue and net income increased significantly.

Technical Analysis

SHLS is trading at the level of $24.7. The 200 EMA, which is presently at $23.9, is providing support for the stock. Since December 2022, the stock has been trading close to the $24 support zone. This is not a positive sign because if a stock trades close to a support zone for an extended period of time, it means that the support zone is deteriorating. If the support zone is broken, I believe a drop to a level of $19 is possible. Therefore, the stock should, in my view, be avoided for the time being.

Should One Invest In SHLS?

They have done quite well over the years in terms of revenue. Over the past three years, they have experienced a significant revenue increase. The estimated revenue for FY23 is $495.5 million, which is 51.5% more than the FY22 revenue. The management is making a lot of effort to meet the revenue goals; they have planned to introduce two new products, the plug-and-play wire harness and BLA 2.0, in FY23; they anticipate that the new products will increase revenue. Additionally, I think they will hit their revenue goals thanks to rising demand for their system solutions and battery storage goods. The growth trajectory of SHLS appears solid, and it is pretty impressive how quickly it is expanding.

Everything appears to be going well so far, with solid financials, a significant growth trajectory, and optimistic revenue forecasts. However, I am concerned about the company's valuation because I believe it to be significantly overvalued. I will use two valuation metrics to judge the valuation. The first ratio is the P/E ratio. The price-to-earnings (P/E) ratio, which compares a company's present share price to its per-share earnings, is used to determine the company's value. They have a P/E ((FWD)) ratio of 44.74x compared to the sector ratio of 17.65x. It shows that they are overvalued. The second ratio is the Price / Sales ratio which shows how much it costs to buy a single share of a company in comparison to the amount of revenue that share brings in for the business. They have a Price / Sales ((FWD)) ratio of 7.4x compared to the sector ratio of 1.41x. After examining both ratios, I came to the conclusion that they are overvalued, and despite the company's excellent development prospects, I will suggest not buying the stock for now.

Risk

The ongoing demand for solar PV systems in the end markets they service will be a factor in determining its future success. The demand for the goods they produce may be impacted by the cyclical nature of the solar business and its recurrent downturns in the past. Due to overproduction and reductions in relevant government subsidies, which also lowered demand, the solar industry has experienced difficult business conditions. There is no guarantee that the solar industry won't experience major downturns in the future, which would negatively impact demand for solar products and the company's operational results.

Bottom Line

Their capacity for growth seems strong. They reported a strong annual performance, with substantial increases in both net income and revenue. The management has given optimistic revenue guidance for FY23. But its price seems way too expensive. They are currently overvalued, in my view, so now is not the time to purchase the stock. As a result, I give SHLS a hold rating.

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