Shoals Technologies Earnings: Strong Start to 2023; Shares Fairly Valued

We maintain our $20 per share fair value estimate for no-moat Shoals SHLS following its first-quarter earnings. While we raise our 2023 estimates following the company’s increased guidance, our long-term financial expectations are largely unchanged. We view shares as fairly valued.

Shoals’ 2023 is off to a strong start. The company raised its midpoint full-year guidance for revenue and adjusted EBITDA by 1% and 3%, respectively. Additionally, gross margins increased over 700 basis points year on year to 46%, in part thanks to a higher systems solutions business mix. While we see these as robust results, they don’t necessarily change our long-term forecast, which already assumes gross margins in excess of 40% and north of 30% adjusted EBITDA margins.

During the balance of 2023, we are monitoring Shoals’ progress against its long-term strategic goals. We expect a full-time CEO to be named shortly following the resignation of former CEO Jason Whitaker earlier this year. Additionally, the company is looking to advance its growth pillars beyond the U.S. utility-scale solar and storage market. These include electric vehicle charging and the international solar market. We are optimistic on Shoals’ prospects for long-term success in EV charging, but we take a more cautious approach in regard to its international endeavors. The international solar market for electrical balance of system, or EBOS, components tends to be highly fragmented, which may make it difficult for Shoals to replicate its domestic success abroad.

Shoals views the competitive landscape within its core U.S. solar market as similar to at the time of its IPO in early 2021, a positive in our view. On May 4, 2023, Shoals filed a patent infringement complaint with the U.S. International Trade Commission against two international competitors (Hikam and Voltage) seeking to sell products in the U.S.