2020 will go down in history as the year of the COVID-19 pandemic. For investors, 2020 has also been the year of growth stocks. Investor favorites like Tesla, Zoom, The Trade Desk, Square, Fastly, Zscaler, and Virgin Galactic have all crushed the market despite earning little to no profits. Most of these companies are actually losing money, but it's their potential for future gains that's led investors to continue bidding up their share prices.
In this vein, last week's IPO of Airbnb was a hot one. The stock more than doubled in its market debut. Despite ongoing losses, it's an industry leader with a bright future. Airbnb could be worth the investment, but don't forget about a solar stock that had its IPO in October: Array Technologies (ARRY -1.41%). Here's why it could be a better buy now.
An established company
Founded in 1989, Array Technologies isn't a speculative, unproven solar company. Over the years, the company has grown into one of the world's largest manufacturers of software and control systems for utility-scale solar projects.
Shares of Array began trading on the Nasdaq on Oct. 15. After closing nearly 25% higher on its first day of trading, shares have settled down roughly 6% higher than their IPO price. This presents a compelling entry point for investors looking at the stock for the first time.
Unlike other recent big-name IPOs, Array Technologies actually makes a profit. For the nine-month period ending Sept. 30, Array took in $692 million in revenue and reported $140 million in adjusted EBITDA. Compared to the same period in 2019, revenue grew 64% and adjusted EBITDA grew 96%.
A leading product
Array leads the market in single-axis tracking systems for ground-based modules. The systems increase solar panel production by up to 25% by adjusting the panels to track the sun from east to west throughout the day. The tracker package consists of steel supports, electric motors, gearboxes, electronic controls, and software which, according to Array, provides a lower levelized cost of energy (LCOE) for its customers. Solar production is a pure efficiency game. The additional electricity generated by optimizing the performance of a solar panel using a tracker has to be cheaper than the electricity that could have been generated from building more panels. Array's tracker is in the sweet spot of this equation.
Array's single-axis model competes with dual-axis trackers that can pivot side to side and up and down. However, the single-axis model has been found to achieve a superior ROI on a commercial scale. According to Array, more than 25% of operational U.S. solar modules are using its product. Array has about 10 years left on the patent for its core product, as well as more than 10 years left on other patents.
Array Technologies is focused on growing its U.S. business, expanding internationally, and acquiring companies as it sees fit. Internationally, Array is pursuing projects in Europe, South America, China, and Australia. The company increased its global footprint (projects, business development, technical resources, supply chain functions, etc.) by more than 50% in the first nine months of 2020. For the quarter, international revenues comprised 10% of total revenue, with the other 90% coming from the U.S. It's important to keep in mind that Array is predominantly a U.S. company and is relatively new to international expansion. Overall revenue growth and a shifting revenue mix that includes a higher international portion will mean customers overseas value Array's products. This would let Array participate in countries that might have even better solar prospects than the U.S. International growth would also diversify its business so that it isn't dependent on one country's market.
As for acquisitions, Array intends to grow revenue by increasing its exposure to other aspects of the solar system -- particularly ones that complement its core business. CEO Jim Fusaro said in a recent conference call with analysts:
Outside of panels, inverters, and mounting systems, our customers purchase as much as $0.13 per watt in other products and components, many of which work directly with, or are complementary to, our tracker. Acquiring companies that make these products can be highly accretive to our margins because we can eliminate duplicate selling expenses since, in most cases, we'd be selling more product to the same customers we already have relationships with.
Array declined to give specific details on which ancillary products and components it would be targeting, but it's clear the company is more focused on increasing its industry-leading tracker position -- not competing in areas outside its core competencies.
Another growth area is purchase agreements with construction and design firms. These contracts guarantee Array an often large amount of sales, providing stable and reliable revenue sources. In late November, Array signed a 1GW purchase agreement with RP Construction Services (RPCS) for the DuraTrack HZ v3 -- Array's flagship product. Array and RPCS have a long-lasting mutually beneficial relationship, with Array manufacturing and supplying the products and RPCS managing and executing most aspects of a given project. It's a win-win situation because Array gets a reliable buyer and RPCS can bid for more projects. By becoming proficient in installing and managing Array's system -- which RPCS considers the market leader -- RPCS is winning more contracts. RPCS' CEO noted that the company has more than tripled its size in three years in part because they are using Array's products. Array's growth will partly depend on how its product stacks up to the competition on the global stage. The more contracts it can land with distributors and project development firms like RPCS, the better.
Plenty of room to grow
Instead of speculating on Airbnb's path to profitability, Array Technologies gives you profits, a plan to grow its business, and a business benefiting from many of the sector tailwinds available to other leading solar stocks. At a market capitalization of just $4.6 billion, Array is one of the smallest IPOs of 2020. Array's biggest competitor, NEXTracker, is owned by parent company Flex, so it's a little difficult to compare valuations. However, the midpoint of Array's guidance suggests full-year 2020 revenue of $855 million and adjusted EBITDA of $158 million, meaning Array is currently growing faster than any U.S.-based publicly traded solar company of its size.
Although Array as a company has been around for over 30 years, it has only faced Wall Street's scrutiny for a few months -- meaning it could endure short-term volatility. Investors can steer clear of Wall Street's noise by following Array's quarterly earnings calls and SEC filings to gain a better understanding of the company's short-term performance and how it fits into the long term thesis to become an internationally recognized leader in solar tracking. In addition to revenue and earnings growth, it's worth paying particularly close attention to Array's gross margins and business partnerships. A growing gross margin means the company is retaining its profitability even as it expands. If Array wants to succeed with its international expansion, it will need to land contracts with companies like RPCS. Be on the lookout for similar deals, as well as any acquisitions that can improve profitability. These findings should help you gauge if the company can meet and exceed its long-term goals.