plur daddy@plur_daddy
$SOLS seeing volatility on a strong print today, I have added. Right now from a factor perspective it is clearly trading with chemical stocks (and SOLS catching strays as the chem stocks all hit hard on Iran deal news) but I believe it can re-rate higher as its nuclear and AI exposure becomes better known.
It was a spin-off from Honeywell late last year so it is relatively uncovered and unknown still. It's a grab bag of underrated businesses with great long-term trajectories and has a few different angles for AI.
Here are some of the keys to the thesis:
1. It has a monopoly on uranium -> UF6 refining in the US, which is going to become more important once Russian HALEU imports become banned at the end of 2027 (HALEU is one more step down the chain after UF6). Meanwhile nuclear power is coming back into vogue, especially given the immense demand for electricity coming from AI data centers.
Old contracts that were struck much lower are now rolling off into spot pricing that is multiples higher, driving a consistent revenue growth trajectory.
Looking out a few years, UF6 -> HALEU capacity in the US is going to be significantly expanded, which means UF6 refining will become the primary bottleneck, and SOLS will have strong pricing power.
2. It has a duopoly on next generation HFO refrigerants. Previously HFC refrigerants were more of a commodity chemical with many producers (including Chinese) but environmental mandates from the EU and US mandated the use of HFO refrigerants, which were co-developed by SOLS and DuPont.
Right now they are still ramping on HFO production so margins are suppressed relative to peak efficiency on the commodity HFC refrigerants. However it is logical to assume that peak margins on HFO will be meaningfully higher than HFC, given that it is a duopoly with two disciplined players vs. a free-for-all including Chinese producers. So there is a big margin story here, which was validated on this quarter as RAS segment EBITDA margins were up 740bps q/q. Note that AI data centers are a user of HFO refrigerants (for overall cooling, not chip level).
3. About 10-12% of revenue comes from their sputtering targets business. Sputtering targets are consumables (consistent revenue stream) that get atomized to deposit films to make up wiring and barriers inside chips for AI. They specialize in copper-manganese sputtering targets for advanced logic at the bleeding edge, in a duopoly with Materion. Each further shrinkage of the process node leads to greater $ content per wafer. They announced they are going to be expanding capacity here as demand has been very high.
4. It has a strong position in immersion cooling. AI data centers generate an immense amount of heat. Right now the dominant cooling paradigm is single phase cooling to the chip. In 2-3 years, there will likely be a transition (alongside NVDA Feynman generation) to immersion cooling, where the whole data center is immersed in liquid. My understanding is that immersion cooling becomes mandatory at 200kw+/rack as direct-to-chip will be insufficient.
They should be able to grow EBITDA close to 20% this year given HFO margin ramp and growth in the nuclear business. If you look at nuclear peers they trade at multiples that are drastically higher, so one way to value it is applying those multiples to the nuclear business and rolling it up piece by piece. They are doing a nuclear-specific investor day in early June so clearly they are trying to build that narrative.
This is a boomer stock and it's a long term play so keep that in mind. It's the type of stock to size moderately and tuck away for LTCG.
Disclaimer: not financial advice, do your own research and analysis, etc.
