Solaris Energy Infrastructure currently trades at $61.07 and has been a dream stock for shareholders. It’s returned 431% since April 2021, blowing past the S&P 500’s 64.2% gain. The company has also beaten the index over the past six months as its stock price is up 35.8% thanks to its solid quarterly results.
Is there a buying opportunity in Solaris Energy Infrastructure, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Solaris Energy Infrastructure Not Exciting?
Despite the momentum, we don't have much confidence in Solaris Energy Infrastructure. Here are three reasons you should be careful with SEI and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
The size of the revenue base is a way to assess topline, and it tells an investor whether an Energy producer has crossed the line between being a more vulnerable commodity taker and a durable operating platform. Scaled businesses tend to produce and generate revenue from many wells, pads, takeaway routes, and geographies, not just a single field or drilling program.
Solaris Energy Infrastructure’s $622.2 million of revenue in the last year is pretty small for the industry, suggesting the company is subscale business in an industry where scale matters.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Solaris Energy Infrastructure’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 32.7%, meaning it lit $32.67 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Solaris Energy Infrastructure burned through $437.7 million of cash over the last year. With $353.3 million of cash on its balance sheet, the company has around 10 months of runway left (assuming its $184 million of debt isn’t due right away).
Unless the Solaris Energy Infrastructure’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Solaris Energy Infrastructure until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Solaris Energy Infrastructure isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 47.2× forward P/E (or $61.07 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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