Solaris Energy Infrastructure currently trades at $65.50 and has been a dream stock for shareholders. It’s returned 806% since August 2021, blowing past the S&P 500’s 76.8% gain. The company has also beaten the index over the past six months as its stock price is up 28.9% thanks to its solid quarterly results.
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Why Is Solaris Energy Infrastructure Not Exciting?
Despite the momentum, we don’t have much confidence in Solaris Energy Infrastructure. Here are three reasons why there are better opportunities than SEI, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
In Energy, scale separates fragile single-asset producers from platform-style businesses that generate revenue across entire basins and infrastructure networks.
Solaris Energy Infrastructure’s $762.2 million of revenue in the last year is pretty small for the industry, suggesting the company is a subscale business in an industry where scale matters.
2. Low Gross Margin Hinders Flexibility
While energy gross margins can be distorted by commodity prices, hedging, and short-term cost swings, sustained margins across a full cycle reflect a producer’s underlying asset quality, infrastructure position, and cost structure.
Solaris Energy Infrastructure, which averaged 42.6% gross margin over the last five years, exhibits subpar unit economics in the sector. It means the company will struggle more at lower commodity prices than peers with better gross margins.
3. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
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 54.6%, meaning it lit $54.57 of cash on fire for every $100 in revenue.
Final Judgment
Solaris Energy Infrastructure isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 79× forward P/E (or $65.50 per share). This multiple tells us a lot of good news is priced in – we think other companies feature superior fundamentals at the moment. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Solaris Energy Infrastructure
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