Shoals: Next Phase of Growth Likely to Prove More Difficult; Lowering Fair Value Estimate to $15

We lower our fair value estimate for Shoals SHLS to $15 from $20 following recent discussions and after reevaluating our financial forecast. The biggest driver of our lower valuation is slower growth estimates for the company’s Big Lead Assembly, or BLA, solution in the U.S. market. We see shares as overvalued.

Shoals has delivered impressive financial results since its initial public offering in early 2021. The company reported over 50% revenue growth in 2022, with a similar growth rate expected in 2023. Growth has been driven by adoption of Shoals’ combine-as-you-go system solution, or BLA, which has taken market share within the utility-scale solar market. Shoals’ BLA solution offers significant labor cost savings relative to traditional wiring architectures, particularly for large-scale solar projects. However, looking forward, we see more muted market share gains for BLA on account of increasing competition and market saturation. As a result, we lower our revenue estimates for 2024 and 2025, resulting in our estimates 8% and 13% lower than Pitchbook consensus.

As growth moderates in Shoals’ core U.S. utility-scale solar market, we expect the company to look to new markets to supplement its growth. The company’s strategic growth plan includes expanding to the international solar and domestic EV charging markets. However, we are less confident the company will achieve a similar leadership position and margin profile in these markets as it enjoys in the domestic utility-scale solar market.