Investing in Clean Energy Makes Me Feel Dirty: FTC Solar $FTCI
Ten Bagger or Bust Series
Welcome back to the “Ten Bagger of Burst” series where the stock under scrutiny has the capability of providing a 10x return in a relatively short period of time, but also has the potential to go to zero.
“Democracy is the theory that the common people know what they want, and deserve to get it good and hard." - H.L. Mencken
Once upon a time I was a chemical engineering student taking a class on quantum mechanics. While I am grateful every day that I changed career paths, for these last few decades, knowing about the efficiency of nuclear energy while watching the Western world crush nuclear development under onerous regulations and throw trillions of dollars at wind and solar projects have really made me cynical of my fellow countrymen and the governments they elect.
My optimism for the future was reinvigorated by the December 2023 COP28 conference where 22 nations pledged to triple their nuclear power generation by 2050. But in the meantime, spending is not yet pulling back on wind and solar projects, despite how they drive up electricity costs to consumers everywhere they are implemented.
I am not enthusiastic about investing in solar, but I have to admit that this sector is about as beaten down as a sector can get. There has been a lot of gravedancing on renewables, as it became apparent that some of the past excesses were a zero interest rate policy phenomenon. However, if interest rates are set to be cut as much as some analysts think they will, solar could easily bounce back with the infrastructure bills passed under the Biden administration. Also, solidly blue states are charging ahead with solar and wind without regard for the paradigm shift that has taken place among more independent minded people. The state governments have enormous spending capacity as their debts have recently been inflated away and their tax revenues rose with inflation. Internationally, countries with limited domestic fossil fuel resources are still pursuing solar for energy independence reasons.
Special thanks to
for sharing his ideas and turning me on to FTC Solar (FTCI). FTCI is a solar tracker systems, software, and engineering company, that is, they design hardware to be manufactured by somebody else in China, so that solar panels can tilt towards the sun, and they sell the installation, software and engineering services to the solar developer. As a generalist investor, I can see that the solar segment is completely bombed out, but I have no clue if the solar tacker business is any good. Fortunately, there are a lot of experts to piggyback on this one.Also, FTCI isn’t the only solar tracker public company, Nextracker Inc. (NXT) has $2.7 billion trailing twelve month revenue and shows continuous growth over the last five years, meanwhile, FTCI has $77 million trailing twelve month revenue down from their 2021 peak of $270 million. FTCI isn’t sending off any quality or growth signals, it is a self admitted “sub scale” company that needs to grow its way into profitability, but meanwhile has been shrinking. It is a turnaround story in a bombed out sector suffering under higher interest rates. The reason for the decline in revenues over this period is that FTCI was the market leader in single axis trackers, but the market moved to dual axis trackers, for which FTCI needs to penetrate a new market all over again.
Invesco Solar ETF:
FTCI Stock Price:
I usually look for companies in the $500 million to $3 billion market capitalization range, as microcaps tend to be a wasteland of swindlers, and midcaps tend to be far more efficiently priced with fewer opportunities. I am willing to go down the ladder in market capitalization as long as the business is fundamentally larger than the market cap would indicate, and it looks as though bankruptcy risk is small. Paid subscribers know that the two companies I am buying more of every week fit into this category, billions in revenue, but a smaller market capitalization than I would normally look for.
FTCI might be a $70 million market capitalization microcap, but in terms of backlog, they are solidly small cap. They currently have $505 million of contracted backlog in their pipeline, and a little less concrete, the non-contracted backlog is another $1.3 billion according to
. One caveat, three major projects are currently delayed, with an estimated start date of Q4 2024. Management claims these delays are due to developers waiting on financing for solar projects. After having listened to earnings calls of two different construction equipment leasing companies, their stories do match up, all claim that clients have jobs to do, but are waiting for a bit of interest rate relief before pulling the trigger. Regarding future contracts going forward, management just bolstered their sales team with two high profile hires to spearhead business development in the US and internationally. This backlog alleviates concerns that FTCI can’t penetrate the dual axis tracker market.Management claims they are on track to reach breakeven economics in 2025, and that they need about $60 million quarterly revenue to reach breakeven. I typically avoid companies that are diluting to survive, but FTCI has about $10 million in cash, and another $10 million in receivables net of payables, so if breakeven really can come in a few quarters, dilution from here on should be somewhat restrained. Management claims they have no intention of using anymore of their equity issuance authorization, but of course, I rarely trust management.
Regarding FTCI as a turnaround, they did just hire a new CEO, Yann Brandt. In my writeup for Advance Auto Parts (AAP), I was a strong advocate of their turnaround story based on the qualifications of the new CEO, and how his logistics expertise fit in with AAP’s most likely problems. In this instance, the same is true, but with a grifter flavor. I’m not saying that Yann Brandt is a grifter, just that he gives off a few of those vibes as everyone in the renewables industry does, and in this instance, there is a good chance he is the right man for the FTCI turnaround. For the last 12 years, Brandt has been the founder and CEO of SolarWakeup, the most widely distributed solar newsletter. With his extensive network of connections in the industry, his background in marketing and business development, and by having his finger on the pulse, Brandt has been very adept at finding incredible niche opportunities, joining those companies, and preparing them for sale.
He co-founded Demeter Power Group, which was sold to Petros PACE Finance. He joined Conergy as Chief Marketing Officer, and Conergy was sold to MacQuarie Capital. He got hired on as president and CEO of Quick Mount PV, and within 23 months, executed a turnaround and sale to Esdec. I believe that Yann Brandt, as CEO, will market the hell out of FTCI, not only to land new contracts, but to take FTCI’s $505 million contracted backlog and $1.8 billion total backlog, generate a year with somewhere in the neighborhood of $500 million trailing twelve month revenue, and sell FTCI for something like 2x sales or better within the span of about two years, at least a 10x return from their current $70 million market capitalization. And while I might prefer a humble midwestern, founder-led salt-of-the-earth company like Titan Machinery (TITN), I am very tempted to piggyback on Yann Brandt’s ability to read the pulse of the solar industry, find incredible opportunities, put lipstick on the pig, and flip it to an empire-building overpaying chump. I don’t think I could invest in the renewables space without clearly delineating who the patsy is, and in this case I think I have, and I think it isn’t me.
On his first earnings call after being hired as CEO, Brandt claimed that FTCI has a brand reputation far in excess of their current footprint, and they have the broadest and most comprehensive offering in the solar tracker space. FTCI sounds like the perfect pig to put lipstick on. And most importantly, as a generalist I have to rely on the judgement of industry insiders, and FTCI has some incredible insider buying since their stock price broke below $1.40 a share. Particularly, the buying from co-founder Ahmad Chatila, managing partner at Fenice Investment Group, a fund that specializes in renewable energy investments. While there is a chance of failure, FTCI might be one of the highest torque investments in the solar energy space.
Due to the weak balance sheet and dilution of FTCI, I have to size this position quite small in my portfolio. Also, the price has already run up from $0.22 to $0.55, so I wouldn’t be surprised if there was a pullback, especially on negative earnings results for the next quarter or two before clients finally pull the trigger on their solar development projects. But regarding terminal value, just a 1x sales multiple on their projected 2025 breakeven revenue would be close to $2.00 a share. A 2x sales multiple on a $500 million annual revenue, which is achievable given their backlog, would be closer to $10.00 a share. FTCI has the potential to be a twenty bagger within two to three years.
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what bene gesserit spice are you taking because i want some too:
"so I wouldn’t be surprised if there was a pullback, especially on negative earnings results for the next quarter or two"
what happens to the solar industry, and this company in particular, if there's a new trump presidency and solar subsidies are killed? where does this company operate? is it a regional at heart, and if so, where?
imo solar can add value in e.g. arizona or nevada or west texas, but not in minnesota [which just passed a solar bill, of course] anyway if the subsidies are killed, the tam and the deal flow will shrink .markedly.
another question i have is about the applicability of their technology. how much value is added by going dual axis over single axis? i imagine that will vary with latitude and siting more generally. the north-south adjustments will help the most relatively where it can gain the least absolutely. e.g. minnesota- the winter sun is a lot lower in the sky but there's much less sunlight to harvest. otoh, in southern arizona the sun's changes in northern vs southern trajectories don't vary so much, so dual axis would add the least relatively speaking, though maybe it can be significant in absolute terms-idk. it might not be worth adding the cost and complexity of tracking systems if your solar farm is outside tucson.
and do these systems have enough history to judge the maintenance issues/costs? on a big solar farm i picture a motor on each collector, with each exposed to large swings in termperature and perhaps precipitation, with the expectation that these motors wlll run 12 hours a day, 365/year, for - how long? [iirc a big solar farm in texas was destroyed by hail not long ago.]
i guess i'm wondering if solar in general is following the trajectory of battery vehicles - big pr splash and subsidies drive an early market, but it turns out they really only work where there's an adequate infrastructure, [enough sunlight instead of enough charging stations] and not nearly as many people want one as was projected, and car companies keep announcing the repurposing of electric vehicle producing facilities along with much reduced production numbers for bev's. to stretch this analogy perhaps too far, non-tracking solar- with its lower cost and lower maintenance burden - might go further in the way that hybrids are now the production targets.
is the existence at all of these axial rotation systems just a function of available subsidies? if we went to world in which energy worked on economics instead of subsidies, i think we'd have solar in the sunbelt, especially the southwest, but if so would they bother with axial trackers?