Solar stock Nextracker's strong quarter is eclipsed by backlog concerns — here's where we stand

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Shares of Nextracker dropped in extended trading Thursday as questions about the solar technology firm’s backlog of projects overshadowed its better-than-expected quarterly results. Revenue in its fiscal 2025 first-quarter rose 50% year over year to $719.9 million, far ahead of the $617.5 million expected by analysts, according to LSEG. Adjusted earnings per share (EPS) also was a big beat at 93 cents compared with the 65-cent estimate, LSEG data showed. Nextracker Why we own it: Nextracker makes industry-leading tracking technology, which enables large-scale solar panel installations to follow the sun’s movement and increase their power generation. The stock can be volatile, but we have a multiyear time horizon on this investment as a long-term bet on growing electricity demand. Competitors: Array Technologies Weight in the Club portfolio: 0.72% Initiation: June 27, 2024 Most recent buy: July 3, 2024 Bottom line A roughly $100 million revenue beat and healthy profits per share were not enough to satisfy Nextracker investors Thursday night. The stock fell more than 4% in after-hours trading, adding to its nearly 5% fall during an ugly trading session for U.S. stocks. In the immediate aftermath of the release, the market response was somewhat muted after Nextracker reiterated its fiscal 2025 full-year guidance despite a strong first-quarter beat. Still, that wasn’t a big problem for the stock because it’s early in the fiscal year, management is known to be conservative, and project timing is understood to be lumpy for utility-scale solar installations. Indeed, CEO Dan Shugar told Jim Cramer that some projects getting completed earlier than expected — and therefore pulled into the first quarter — is why its results for the April-to-June period were so strong. And with political uncertainty aplenty, we can’t fault management for wanting to stay conservative. Scrutiny of Nextracker’s revenue backlog came more into focus during Nextracker’s conference call with analysts. And it seems to be the overarching concern around the quarter. In a shareholder letter, Nextracker said its backlog grew sequentially and stood at “over $4 billion, approximately 80% of which is expected to be recognized over the next [eight] quarters.” That sounds good on its face, but it gets more complicated when considering that Nextracker ended its fiscal 2024 in March with what it described at the time as a record backlog of more than $4 billion. Before the conference call Thursday, analysts at Truist Securities highlighted the similar description in backlog size, contending it “will likely raise questions around activity levels in an otherwise positive report.” Indeed, management fielded inquiries on the state of the backlog, including one from Well Fargo analyst Praneeth Satish, who specifically asked whether the “over” the next eight quarters language was a shift from prior management commentary that said the backlog would be recognized “within” eight quarters. Did it mean some deals were being elongated? Turned out, it was an astute observation from the analyst. “It is a bit of a shift, honestly,” Nextracker President Howard Wenger responded, before going on to explain that project lifecycles are “getting a bit longer” due in large part to the permitting process and what’s known as interconnection, which is basically hooking up the solar field to the broader electricity grid. That, in turn, impacts the pace at which Nextracker’s backlog becomes reported revenue. “The flip side is that we’re getting even more visibility, longer-term visibility, which is good for the company. That backlog is still solid,” Wenger said. “Projects are not dropping out. In fact, we did a review of our projects internally. We had literally one project drop out in the last 12 months. So, it’s very, very solid backlog.” NXT YTD mountain Nextracker’s year-to-date stock performance. We recognize this may seem a bit granular — “over” versus “within?” Really? But for analysts building financial models and certain investors, especially traders with shorter time horizons, it can draw considerable attention. It also matters to us and helps shape our views on the near-term outlook for the stock. At the same time, we’re viewing this backlog debate through our own investment lens. When we initiated our Nextracker position in late June, we did so understanding that it’s a volatile stock with a compelling multiyear story that can be difficult to judge on a quarter-to-quarter basis. It’s why we started the position on the smaller side and carefully added to it once. The crux of our thesis is the world’s growing electricity requirements, and the increasing role for solar in meeting those needs. That’s particularly true because some of the biggest companies behind the rising power consumption — the likes of Amazon , Microsoft and Meta Platforms — are committed to clean energy for their electricity-hungry data centers. The other part of our thesis is related to its sensitivity to interest rates. The residential solar market has been hurt by higher rates more than the utility-scale solar market Nextracker operates in, but the cost of money matters across the board. With interest rate cuts on the horizon, the economics of solar projects should get a whole lot better. ” Because with renewable energy like solar and wind, most of the cost of the life of the project is right up front, and that gets amortized out. There’s no fuel. Maintenance is very, very low as a cost item. So, we’re hopeful that the Fed does lower rates,” CEO Shugar explained to Jim in a “Mad Money” interview Thursday. “That would be a very strong help to utility-scale solar as a category and for Nextracker.” Of course, we would have loved to see a more significant step up in Nextracker’s backlog and heard that the bottlenecks to project completion were being alleviated by the day instead of being stickier than before. But nothing in Thursday night’s results and conference call changes the long-term story. Nextracker still has industry-leading tracking technology that helps customers maximize their power generation. In fact, one analyst on the call said their checks suggest the company is gaining market share, and management didn’t push back on that contention. “The market continues to be healthy and we’re getting at least our fair share of the market,” Wenger said. Nextracker still has a quality balance sheet, even after tapping its cash pile in June to buy Ojjo , which makes foundations for large-scale solar installations that it says use less steel and labor than conventional systems. And Nextracker’s executive team, led by CEO Shugar and Wenger, maintains its track record of execution. Guidance Nextracker reaffirmed its fiscal 2025 guidance for revenue, adjusted EBITDA and diluted earnings per share: Revenue: $2.8 billion to $2.9 billion Adjusted EBITDA: $600 million to $650 million Adjusted diluted EPS: $2.89 to $3.09 In his interview with Jim, CEO Shugar defended the decision to maintain guidance by saying, in part, “our year is young.” Given the way project timing can be variable, we certainly understand the desire to maintain the guide at this point in the fiscal calendar. Additionally, executives said that projects in the first quarter were more heavily weighted toward the U.S., where margins are higher, than what’s expected in the rest of the year. In the first quarter, it was about 71% domestic and 29% international compared with a normal mix of two-thirds and one-third, respectively. That helps explain not only the company’s strong gross margin and EBITDA margin in the first quarter, but also the rationale for leaving their profitability guidance unchanged. With a heavier international mix in the coming quarters, margins may not be as strong as the first quarter. (Jim Cramer’s Charitable Trust is long NXT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

In an aerial view, the Kayenta Solar Plant is seen on June 23, 2024 in Kayenta, Arizona.

Brandon Bell | Getty Images

Shares of Nextracker dropped in extended trading Thursday as questions about the solar technology firm’s backlog of projects overshadowed its better-than-expected quarterly results.

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Solar stock Nextracker's strong quarter is eclipsed by backlog concerns — here's where we stand

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