Shoals Technologies Group May Soon Decide Which Direction To Go (NASDAQ:SHLS)

Shoals Technologies Group (NASDAQ:SHLS) has spent the last several weeks going sideways after recovering a portion of the losses the stock suffered earlier in the year. However, the charts suggest a change in direction is coming. In addition, while either direction is possible, there are clues to be found elsewhere as to which direction is the more likely one. Why will be covered next.

Why SHLS is likely heading for a change in direction

The stock is down 33% YTD. However, losses were much bigger not that long ago. SHLS spent most of the first half of 2022 on a gradual decline that culminated in the stock losing as much as 60% at one point. But in the last few months, things have improved with the stock recouping some of earlier losses. The chart below shows how the stock has declined in 2022.

The moves in the last few months have reduced YTD losses. However, the rally seems to have lost steam. Note how the stock has essentially gone sideways in recent weeks, indecisive as to which direction it wants to go. Each move up was followed by a move down and vice versa, resulting in the stock having gone nowhere in particular. The stock appears to be stuck in consolidation mode.

The recent price action has resulted in the charts painting what could be described as a symmetrical triangle, which consists of two trend lines converging on one another at roughly an equal slope. The upper trendline is formed by connecting a series of lower highs and the lower trendline is formed by connecting a series of higher lows. The stock has moved between the two extremes of the triangle, but this is getting harder to do with the triangle becoming smaller and smaller.

The stock has two options available with space running out as the trendlines slowly converge. Either there is a breakout through the upper trendline or there is a breakdown through the lower trendline. At this point, it’s not certain as to which direction the stock is heading for. What is certain is that the stock is unlikely to keep going sideways with the two trendlines not that far away from converging.

It’s worth mentioning that the stock has been hugging the lower trendline in recent days. In fact, the stock breached support provided by the lower trendline on Friday, July 15, if only temporarily. The stock managed to recover after the initial drop, closing the day with the trendline still intact. Bulls might take confidence in a failed breakdown.

On the other hand, bears might find the latest price action encouraging. The stock failed to stay below support, but it’s possible a follow-up attempt might be successful. At the very least, the fact that the stock was able to fall below support suggest support is weakening, which increases the odds of a successful breakdown for a sustained move down. The stock is also getting closer to falling below the 50-day moving average, a bearish sign.

Why SHLS fell on Friday

The stock fell almost 10% on Friday and not without reason. SHLS is a supplier of electrical balance of systems or EBOS solutions for solar, battery storage and electrical vehicle charging infrastructure. Anything that stimulates the adoption of clean energy is therefore a plus for SHLS. Accordingly, SHLS has benefited from news that the U.S. Congress is working on an economic package to combat climate change, which would include tax breaks for renewable energy, electrical vehicles and other clean power sources.

However, coming to an agreement took a big hit on Friday with Senator Manchin announcing he would not support new spending on climate measures. SHLS fell, but it recouped most of its losses, ending the day down just 1%. Still, the news is likely to embolden the bears. Short interest, for instance, has been on the rise lately. Short interest now stands at 11.3M, which translates to a short float of roughly 10.2%.

Growth is under pressure

The government inaction comes at a bad time. The latest setback comes at a time when growth at SHLS is already experiencing headwinds. A look at the most recent quarterly report shows why. On the one hand, Q1 FY2022 managed to bounce back from a disappointing Q4. Q1 revenue increased by 41% QoQ and 49% YoY to $68M, a new record high.

On the other hand, bottom-line growth did not keep up with top-line growth. Non-GAAP EPS was flat YoY at $0.05. In terms of GAAP, EPS was $0.02, which is better than the loss of $0.06 in the prior year. However, it’s worth noting that GAAP earnings in Q1 FY2021 were weighed down by a $16M loss on debt repayment, skewing the quarterly comparisons. Adjusted EBITDA was $16.5M, up from $14M a year ago.

Gross margin increased by 560 basis points QoQ to 38.7%, but that is less than the 41.2% of a year ago. Margins were affected by higher raw material and logistics costs, as well as a higher mix of component sales, which come with lower margins than system solutions. GAAP operating expenses came close to doubling YoY due to increased stock-based compensation, increased payroll due to higher headcount and spending on product initiatives.

The backlog was $302.3M, up from $299M, $270.7M and $200.5M in the preceding quarters. On the other hand, the numbers suggest a slowdown in bookings is underway. Bookings was about $71M in Q1 versus $76M and $130M in the preceding quarters. Cash and equivalent dropped in half to just $2.5M, lagging far behind total debt of $286M. The table below shows the numbers for Q1 FY2022.

(GAAP)	Q1 FY2022	Q4 FY2021	Q1 FY2021	QoQ	YoY
Revenue	$67.976M	$48.046M	$45.604M	41.48%	49.06%
Gross margin	38.7%	33.1%	41.2%	560bps	(250bps)
Income (loss) from operations	$10.007M	$2.680M	$9.890M	273.40%	1.18%
Net income (loss) attributable to SHLS	$2.640M	($1.837M)	($2.859M)	–	–
EPS	$0.02	($0.04)	($0.06)	–	–
(Non-GAAP)
Net income (loss)	$9.043M	$0.874M	$8.771M	934.67%	3.10%
EPS	$0.05	$0.01	$0.05	400.00%	–

Source: SHLS Form 8-K

A big factor underpinning the slowdown in growth is the investigation by the U.S. Department of Commerce into solar cells and panels from South East Asia. This has resulted in projects being put on hold. From the Q1 earnings call:

“despite standing up record revenue for Q1, we were still able to grow our backlog, which we do continue to trend over time. But one thing that we did want to say is until AD/CVD is resolved, there is a possibility that we may see slower growth in backlog and award orders in the future. But that’s but a moment in time. It’s hard to say right now.”

A transcript of the Q1 FY2022 earnings call can be found here.

In light of recent developments, SHLS lowered its outlook for FY2022. The previous guidance called for FY2022 revenue of $300-350M, adjusted EBITDA of $79-97M and adjusted net income of $54-69M.

“Based on current market conditions and input from our customers and team, we are reaffirming the low end of our revenue outlook, despite industry challenges and expect 2022 revenues to be in the range of $300 million to $325 million, up 41% to 52% year-over-year. We expect adjusted EBITDA to be in the range of $77 million to $86 million and adjusted net income to be in the range of $45 million to $53 million.”

The updated guidance calls for FY2022 revenue of 300-325M, adjusted EBITDA of $77-86M and adjusted net income of $45-53M, all worse than before.

Valuations may be too high in today’s market

There is another factor that may work in favor of lower stock prices for SHLS. SHLS is still growing fast, but you’re also asked to pay a high multiple for that growth. It’s true high valuations are quite common for EV plays and SHLS is an EV play. Still, high valuations could be a problem in today’s market where it is harder to generate interest in stocks trading at lofty valuations. For instance, SHLS trades at 85 times forward earnings with a trailing P/E of 165. The table below shows the multiples for SHLS.

	SHLS
Market cap	$2.71B
Enterprise value	$2.09B
Revenue (“ttm”)	$235.6M
EBITDA	$49.0M
Trailing P/E	164.80
Forward P/E	84.53
PEG ratio	–
P/S	7.14
P/B	230.56
EV/sales	8.88
Trailing EV/EBITDA	42.67
Forward EV/EBITDA	25.79

Source: Seeking Alpha

Investor takeaways

SHLS has and continues to benefit from a number of structural changes underway. For instance, electrical vehicles continue to see greater adoption, which in turn requires increased investment in related charging infrastructure. High energy prices for electricity generated from fossil fuels encourages people to look at alternatives like solar.

SHLS is relatively new as a listed company and it has therefore yet to gain an established track record. Nevertheless, there is reason to believe the company could do well, especially in the long run. If the future of the planet is to be green, then companies like SHLS are in a position to take advantage from it. The latest forecast sees FY2022 revenue growing by 41-52% YoY. SHLS is still a company on the move.

However, the latest forecast is not as good as the previous one. SHLS is dealing with a number of headwinds that are contributing to slowing growth. The latest one being lack of agreement in the U.S. Congress as to whether there should be additional spending on climate change, an initiative SHLS expects to benefit from.

While the outlook still calls for fast growth, it’s possible SHLS could be on the verge of a rapid deceleration in the coming quarters. There are already signs things are slowing down for SHLS and there’s no way of knowing when that will come to an end. Uncertainty is on the rise. SHLS has already had to lower its guidance and it may not have been for the last time.

The stock has been pretty much on hold going sideways, but there is reason to believe the stock is gearing itself for a change in direction. While a move up is not impossible, the odds favor a move down. The stock has been challenging support for a while and it actually broke through it last Friday, if only temporarily. The stock moved back above support, but it might stay below on a subsequent breach below support.

I am neutral on SHLS. While SHLS continues to grow, growth appears to be slowing down for a number of reasons. Moreover, the issues slowing down growth are unlikely to be resolved anytime soon. The charts seem to favor lower stock prices for SHLS. Multiples are very much on the high side for SHLS. Take all this together and keeping your distance is the way to go.