Shoals Earnings: Cautious Commentary Overshadows Strong Results

We lower our fair value estimate for no-moat Shoals SHLS to $11 from $15 following third-quarter results. The driver of our lower valuation is a higher percentage of our long-term revenue from the company’s lower-margin components segment as growth slows in its higher-margin system solutions segment. We view shares as overvalued.

Shoals’ third-quarter results were generally robust, in our view. While its full-year revenue outlook was shaded to the bottom half of the range, Shoals raised adjusted EBITDA guidance by 12% at the midpoint thanks to expanding gross margins. Gross margins through the first nine months averaged nearly 49%, up from 39% in 2022. These results exclude a $50 million provision for faulty wire from a specific supplier, which Shoals recognized in the quarter. We largely exclude this charge and any potential future charges from our modeling as we expect Shoals to prove successful in its complaint filed against the wire supplier.

Cautious management commentary regarding slowing growth in its core U.S. utility-scale market is to likely overshadow the positive financial update, in our view. We reiterate that we expect Shoals’ next phase of growth to prove more difficult than in recent years as it looks to new markets (international, EV charging) to drive continued growth. Management is seeing initial traction on the international front, with non-U.S. now making up over 10% of the company’s backlog and awarded orders. However, we caution that the long-term margin potential of the international market is likely to trail the U.S. given a more fragmented landscape.

Shoals’ margin profile ranks among the best in our broader solar coverage universe, but we continue to question its long-term durability given our no-moat rating. As such, we view shares to be overvalued.