Shoals Technologies Group (SHLS)

Hello guys! I just wanted to share a small summary of a stock that I really like. In my opinion, it’s worth taking a closer look at the U.S. utility-scale solar industry, particularly the companies alongside Shoals: Array (ARRY), First Solar (FSLR), and NextPower (NXT).

Please forgive me if I’ve made any spelling mistakes (I’m Spanish, and I used AI to translate all my research) so I could share it with you guys. I hope you guys enjoy It!

1. BUSINESS MODEL

Shoals Technologies Group (SHLS) is a provider of electrical balance of system (EBOS) solutions for photovoltaic systems in the industrial solar segment. SHLS’s entire supply chain is located in the United States.

When we talk about “EBOS,” we refer to all the components required to transport the electric current generated by solar panels or stored in a battery energy storage system (BESS). In other words, everything that is not the panels themselves or the inverter/batteries, but rather the “electrical framework” that connects everything together.

2. SUMMARY OF THE THESIS

-Energy demand in the United States is high. Solar energy is the fastest and most cost-effective way to meet that need. Utility-scale solar power is growing rapidly in Republican states, especially in Texas and Florida. The project queues in the inventories of major power grids—such as California (ISO) and Texas (ERCOT)—reflect the market’s preference for utility-scale solar energy.

-The political disruption in the United States following the 2024 elections caused most solar projects to be postponed to fiscal year 2025. This directly impacts a wiring company, as it is the last component to be installed.

-The new Republican legislation speeds up the deadlines for claiming tax incentives related to solar projects (IRA tax credits). To claim 100% of these tax benefits, project construction must begin before July 4, 2026, or be “in service” before December 31, 2027. The Trump administration has created a “seller’s market” in the utility-scale sector.

-The shortage of qualified workers in the solar industry has given SHLS a market share of over 50%. Its BLA (Big Lead Assembly) solution is a plug-and-play cable that is custom-made for each project and helps reduce both time and labor costs.

-The nature of the wiring segment (minimal impact on the project’s internal rate of return) allows the company to sell a “customized” and “premium” product. Since its initial public offering, the company has maintained the highest and most stable gross margins in the entire industry (gross margin > 30%.

-For several reasons (including its IPO), the company has more than $400M in deferred tax assets. The company accrues taxes in its profit and loss statement; however, there is no actual cash outflow reflected in its cash flow statement. Sell-side analysts are underestimating the utilization of these deferred tax assets.

-The company is effectively transitioning into the battery storage (BESS) segment. Batteries are used as support and are compatible with any energy source (solar, natural gas, etc.). A BESS installation contains far more wiring than a solar project. Projections from the Renewable Energy Laboratory (NREL) https://docs.nrel.gov/docs/fy25osti/93281.pdf estimate that wiring costs in BESS systems will continue to increase through 2035. SHLS estimates its total addressable market (solar + BESS, data centers) at over $5 billion. Its BESS products were launched in Q3 2025 and have grown by 272% quarter over quarter. According to my calculations, the BESS segment contributes approximately 30% of new revenue for fiscal year 2026.

-During the 2023–2025 period, the company recorded a high level of investment CAPEX that will not recur in the 2026–2030 period. Online sources reporting ROIC figures have not separated this “extraordinary” CAPEX, thus underestimating both the current ROIC and the ROIC projected for the 2026–2030 period.

-Buying the market leader in utility-scale solar wiring at a “normalized” P/E of 19 and a current PEG ratio of 0.69 seems like a good deal to me.

3. VALUATION

-DCF assumptions:

I can’t attach my DCF, but I share with you guys the assumptions of my model:

-A 2% increase over sell-side estimates due to the company’s new business divisions (BESS).

-Shoals maintains margins of 35%, in line with its historical results; the company’s inclusion in higher value-added segments (BESS) should help support this level.

-The DCF model incorporates the impact of DTAs on the company’s future cash flows. To do so, I differentiated between taxes “accrued” in the P&L statement and actual taxes paid (cash taxes) in the cash flow statement.

-Depreciation remains at its historical levels.

-Finally, I performed the transition from free cash flows to enterprise value, from enterprise value to equity value, and from equity value to price per share. My key model assumptions are:

-To remain conservative, I used a perpetual growth rate of 1% and a discount rate of 10% (the minimum required return we should demand for our portfolio).

-I also built a sensitivity table to assess the impact on valuation under different discount rates and perpetual growth rates.

Most notably, the company’s stock appears to fall within a range of $12 to $15 per share, which suggests an undervaluation of about 124% to 79% relative to its current price of $6.41.

-Shoals financial ratios (source TIKR terminal):

Efficiency

• LTM Gross Margin 35,0 % * LTM EBIT Margin 15,7 % * LTM ROA 5,5 % * LTM ROE 5,8 % * LTM ROIC 9,6 % * LTM ROCE 9,6 %

Valuation

• NTM EV/EBITDA 10,66x * NTM P / E 15,77x * NTM MC / FCF 21,47x * LTM EV/Revenues 2,62x

Growth

• Fwd 2-Yr Rev. CAGR 17,3 % * Fwd 2-Yr EBITDA CAGR 18,9 % * Fwd 2-Yr EPS CAGR 18,5 % * Last 3-Yr Rev. CAGR 13,3 %

4. RISKS

-The wiring market becomes commoditized in a similar way as the photovoltaic panel segment. The market no longer values SHLS’s “premium” products, and its competitors attack succesfully its moat, eroding revenues, margins, and shareholder returns for Shoals.

-The stock has fallen 30% following Q4 2025 earnings results. SHLS failed to beat the sell-side EPS estimates. The company faces elevated SG&A expenses due to three legal proceedings (one for defending its patent, the second one for claiming damages from its wiring supplier and the third one against a group of shareholders). These expenses have weighed on EPS, but are expected to decline throughout 2027.

-Its expansion into the BESS market fails because that segment does not demand “bespoke” wiring and instead prefers “in-house” products from large established players such as Siemens or Eaton.

-The company paid $34M annually for defective cables supplied by its vendor, Prysmian. This expense was recognized as an increase in COGS and dragged down free cash flow for two years. If new defective cables appear, the company will expand its “warranty liability” on the balance sheet.