Shoals Looks to New Markets as US Solar Market Encounters Delays

Equity Analyst

Brett Castelli

Shoals has crafted a market-leading position within the solar electrical balance-of-system, or EBOS, market. EBOS is a lesser-known segment of solar and comprises components transferring electrical current from solar modules to an inverter. The main customers of EBOS are engineering, procurement, and construction firms building solar projects.

While EBOS is relatively cheap (5% of project’s cost), it is expensive to install. Installation costs can be greater than the cost of the components. Shoals’ strategy against this backdrop is to provide solutions that reduce complexity and installation time, saving customers money.

Shoals has long been a provider of EBOS components to the utility-scale solar industry, but the introduction of its big lead assembly, or BLA, in 2017 marked an inflection point. The product introduced a new architecture for projects, which reduced the amount of wiring and eliminated the need for licensed electricians, helping lower installation costs. 

Shoals achieved rapid success by targeting the largest EPCs. Moving forward, the company is looking to expand its market share by continuing to target EPCs, while also building inroads with developers, which we believe would increase customer stickiness. Additionally, Shoals should benefit from more projects with solar and storage, which have over 50% higher EBOS costs, and new products addressing a broader range of EBOS needs.

Longer-term growth ambitions include expanding its international presence and entering the electric vehicle charging market. We view the company’s international ambitions with a wait-and-see approach. The company has been operating internationally for a few years, but non-U.S. customers accounted for negligible sales in 2023 and the international market is more fragmented than the U.S.

We take a more constructive view toward the EV charging market opportunity. The EV market is plagued by similarly high installation costs (half of total cost is installation versus 30% for solar).

Business Strategy & Outlook

We assign a no-moat rating to Shoals. While the company enjoys robust margins and returns on invested capital today, we lack enough confidence that these will persist over the long-term to assign an economic moat.

Shoals is a supplier of electrical balance of system, or EBOS, components to ground-mount solar projects. EBOS is a lesser-known segment of the solar value chain and comprises components carrying electrical current from solar panels to an inverter. Major EBOS components consist of lower-tech items, such as: wiring and cables, combiner boxes, fuses, and wire management solutions. EBOS represents only about 5% of a typical project’s costs but is costly to install. Installation costs can be 1.6 times the cost of components.

EBOS’ characteristics--inexpensive, high cost of failure, limited addressable market--likely limits competitors compared with solar hardware such as solar panels and inverters. In the U.S., Shoals is believed to be by far the largest solar EBOS provider. Its competition is much smaller in size and scale. Internationally, the market is highly fragmented and characterized by smaller companies serving local markets.

Shoals’ robust profitability today is underpinned by its system solutions, namely its big lead assembly, or BLA, which was launched in 2017. The BLA introduced a new architecture for solar projects (“combine-as-you-go”), which dramatically reduced the amount of wiring, eliminated combiner boxes, and does not require licensed electricians. This translated to significant labor cost savings--Shoals estimates greater than 40% savings--compared with conventional solutions.

Can Shoals maintain elevated levels of profitability?

Shoals has a strong track record of innovation within solar EBOS, including its BLA solution in 2017. Despite a track record of introducing new products, we do not view Shoals as having an intellectual property advantage over competitors. The company spends a modest amount on research and development relative to broader solar industry peers, limiting its IP advantage. Further, we have found many of the benefits espoused by Shoals such as reduced labor costs also are advertised by competitor solutions.

Shoals’ BLA is considered a custom system solution slightly unique to each solar project. This presents additional complexity with manufacturing and we believe Shoals currently enjoys a manufacturing advantage over its smaller competitors by being able to manufacture high volume but also high mix. Despite having a current advantage, we do not think it supports a long-term advantage given the manufacturing equipment is relatively inexpensive.

A critical moat question for Shoals is, are there switching costs for its customers? We see factors such as high cost of failure and inexpensive cost as potentially leading customers to ignore modest price differences between solutions. However, we think a larger factor in increasing customer stickiness is the company’s mix between selling to EPCs and developers. To date, Shoals has largely targeted EPCs to build market share quickly. We consider EPC relationships generally less sticky as EPCs are more apt to switch to lower-priced options. Conversely, we think relationships with the end customer such as a developer are stickier since developers can dictate equipment suppliers to a particular EPC. Shoals is beginning to target more developers as customers and, if successful, could increase the stickiness of its customer relationships.

None

Economic Moat

Shoals Technologies Group

Shoals Technologies Group, Inc. provides electrical balance of system solutions for solar energy projects. Its EBOS components include cable assemblies, inline fuses, combiners, disconnects, recombiners, wireless monitoring systems, junction boxes, transition enclosures and splice boxes. The company was founded by Dean Solon in November 1996 and is headquartered in Portland, TN.

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