NEXTracker (NASDAQ:NXT) is an attractive, differentiated investment opportunity within the solar industry that is growing quickly and trading at a surprisingly cheap valuation. I’m bullish on NEXTracker based on the company’s impressive revenue and earnings growth, the increasing demand for its products (as indicated by its rapidly growing backlog), and its modest valuation, given its strong results.
Adding to this investment appeal, the stock receives a Strong Buy rating from sell-side analysts, who collectively view it as having upside potential of over 30%. Furthermore, the stock receives a coveted “Perfect 10” rating from TipRanks’ quantitative Smart Score system.
What Is NEXTracker?
NEXTracker provides integrated solar tracker and software solutions used by industrial- and utility-scale solar generation projects in over 40 countries worldwide (spanning North America, South America, Europe, the Middle East, Africa, and Australia).
Essentially, this is a fancy way of saying that NXT’s products enable solar panels to track the movements of the sun across the sky in order to enhance their performance and maximize their energy output. This optimization helps solar projects generate more power and increase their return on investment.
NXT is the market leader with a 30% share in this lucrative market and has enjoyed this leading position for a decade. While the manufacture and installation of solar panels is largely a commoditized business, what I like about NXT is that unlike companies operating in those parts of the solar industry, Nextracker offers differentiated products and solutions. The company holds 132 mechanical patents, 52 electronics and controls patents, and 171 software-driven yield improvement patents.
For Fiscal 2024, which the company just completed, NXT generated record revenue and record profits. For the full year, revenue grew 31% to $2.5 billion, while adjusted EBITDA grew by 150% to $521 million. Additionally, the company’s backlog has tripled from $1.3 billion in Fiscal 2022 to a record $4 billion in 2024, indicating increasing demand.
Meanwhile, there is plenty of reason to believe demand will increase going forward, with the IEA’s World Energy Outlook forecasting that by 2030, solar power will generate as much electricity as the entire U.S. power grid does today.
NXT CEO Dan Shugar forecasts that data centers will be a major demand driver for solar energy. Demand for new data centers is growing, thanks to the rise of artificial intelligence. Goldman Sachs (NYSE:GS) predicts that demand from data centers will more than double to 8% of U.S. electricity demand by 2030, and Shugar says that solar will power much of this new demand.
Surprisingly Cheap Valuation Makes NXT a Lynchian Favorite
What I really like about NXT is that many stocks with high growth potential, like solar stocks, are either very speculative, not yet profitable, or are profitable but trade at extremely high valuations. However, this isn’t the case at all with NXT. In fact, the stock trades at a surprisingly modest valuation of just 15.5 times forward earnings estimates, well below the broader market’s multiple of 24.1 times earnings.
NXT also looks attractive based on its PEG ratio of just under 0.4x. Prized by legendary investor Peter Lynch, whose Magellan Fund beat the stock market for many years, the PEG ratio is a useful method for valuing growth stocks.
The PEG ratio is simply a stock’s price-to-earnings ratio divided by its earnings growth rate. The lower the PEG ratio, the more attractive a stock is based on this measure. Lynch generally considered a PEG ratio of under 1.0x to be attractive, so NXT’s PEG ratio of under 0.4x looks particularly enticing by this measure.
Is NXT Stock a Buy, According to Analysts?
Turning to Wall Street, NXT earns a Strong Buy consensus rating based on 16 Buys, five Holds, and zero Sell ratings assigned in the past three months. The average NXT stock price target of $60.47 implies 27.7% upside potential from current levels.
A Smart Solar Stock
Wall Street analysts view NXT as a Strong Buy, and the Smart Score also views the stock very favorably. The Smart Score is a proprietary, quantitative stock scoring system developed by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating, so NXT’s “Perfect 10” Smart Score is particularly compelling.
Sunny Skies Ahead
Nextracker has an enormous opportunity ahead of it as more utility-scale solar projects are built around the world. These projects can benefit from the way that Nextracker’s products enhance their solar yield. I’m bullish on Nextracker based on this large secular growth opportunity, plus the stock’s modest valuation, attractive PEG ratio, and strong ratings from both Wall Street analysts and TipRanks’ proprietary Smart Score system.
