Shoals (SHLS)

Solar energy systems company Shoals (NASDAQ:SHLS) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 11.2% year on year to $80.63 million. On top of that, next quarter’s revenue guidance ($105 million at the midpoint) was surprisingly good and 10.4% above what analysts were expecting. Its non-GAAP profit of $0.03 per share was in line with analysts’ consensus estimates.

Company Overview

Started in Huntsville, Alabama, Shoals (NASDAQ:SHLS) designs and manufactures products that make solar energy systems work more efficiently.

Renewable energy companies are buoyed by the secular trend of green energy that is upending traditional power generation. Those who innovate and evolve with this dynamic market can win share while those who continue to rely on legacy technologies can see diminishing demand, which includes headwinds from increasing regulation against “dirty” energy. Additionally, these companies are at the whim of economic cycles, as interest rates can impact the willingness to invest in renewable energy projects.

Competitors of Shoals Technologies include ABB (NYSE:ABB), Amphenol (NYSE:APH), and private company TMEIC.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Shoals’s sales grew at an incredible 20.9% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Shoals’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 3.4% over the last two years was well below its five-year trend.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Shoals’s backlog reached $645.1 million in the latest quarter and averaged 2.7% year-on-year growth over the last two years. Because this number is in line with its revenue growth, we can see the company effectively balanced its new order intake and fulfillment processes.

This quarter, Shoals’s revenue fell by 11.2% year on year to $80.63 million but beat Wall Street’s estimates by 8.6%. Company management is currently guiding for a 5.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.2% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and implies its newer products and services will fuel better top-line performance.

Shoals’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 36.9% gross margin over the last five years. Said differently, roughly $36.92 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Shoals produced a 35.2% gross profit margin in Q1, marking a 4.9 percentage point decrease from 40.2% in the same quarter last year. Zooming out, however, Shoals’s full-year margin has been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Shoals has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Shoals’s operating margin decreased by 9.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Shoals generated an operating profit margin of 5.3%, down 7.4 percentage points year on year. Since Shoals’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Shoals’s EPS grew at a weak 2.5% compounded annual growth rate over the last five years, lower than its 20.9% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Shoals’s earnings can give us a better understanding of its performance. As we mentioned earlier, Shoals’s operating margin declined by 9.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Shoals, its two-year annual EPS declines of 18.7% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q1, Shoals reported EPS at $0.03, down from $0.07 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Shoals to perform poorly. Analysts forecast its full-year EPS of $0.30 will hit $0.43.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Shoals has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 13.8% over the last five years.

Taking a step back, we can see that Shoals’s margin expanded by 10.7 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Shoals’s free cash flow clocked in at $12.35 million in Q1, equivalent to a 15.3% margin. This result was good as its margin was 3.9 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Shoals’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 10.3%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Shoals’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Shoals reported $35.61 million of cash and $141.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $91.42 million of EBITDA over the last 12 months, we view Shoals’s 1.2× net-debt-to-EBITDA ratio as safe. We also see its $6.65 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Shoals blew past analysts’ revenue and EBITDA expectations this quarter. We were also glad its revenue guidance for next quarter and its full-year EBITDA guidance trumped Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 5.8% to $3.99 immediately after reporting.

Updated: May 22, 2025 at 11:13 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Shoals isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s rising cash profitability gives it more optionality, the downside is its declining EPS over the last four years makes it a less attractive asset to the public markets.

Shoals’s P/E ratio based on the next 12 months is 10.7x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $6.25 on the company (compared to the current share price of $4.58).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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