2023-10-17 01:42:15 ET
Summary
- Sunnova Energy International Inc. is expected to report Q3 earnings with declining expectations but overall revenue growth of ~40% YoY.
- The stock has been on a downtrend, down 44% in the last year, and the current operating environment lacks catalysts for a turnaround.
- Sunnova's increasing debt and cash burn raise concerns about the company's financial health and going concern assumption.
Sunnova Energy International Inc. ( NOVA ) is like the noble cause you want to support but just don't have the means to do so, even though you want it to succeed so bad. What is not to like about this company's mission, " to create a better energy service at a better price, because we believe all people should have energy independence. "?
Sunnova Energy was founded in 2012 with the goal of providing clean, affordable, and reliable energy to homeowners and businesses. The company's products and services include home solar panels, battery-based backup power options, EV charging, and generators. The company went public in July 2019 with a $12 initial offering price. The stock quickly caught attention as it went past $50 in early 2021 before losing power (sorry!) and falling below its IPO price. Sunnova Energy International is expected to report its Q3 earnings after-hours on Wednesday, October 25th. This article presents 5 key items that investors need to be aware of heading into earnings. Let us get into the details.
NOVA Q3 Preview (Seekingalpha.com)
Declining Q3 Expectations But Heading In The Right Direction Overall
Sunnova is going into Q3 report with steadily declining expectations. The company is expected to report a non-GAAP loss of 23 cents per share on the back of $210 million revenue. Sunnova's earnings history in its early days as a public company is nothing much to shout about as it has beaten EPS estimates just 4 out of the last 12 quarters and 7 out of the last 12 when it comes to revenue.
However, should the company meet the revenue estimate of $210 million, it'd hands down be the highest quarterly revenue at least since going public. It'd also represent a YoY revenue growth of ~40% and that's impressive.
Sunnova has also been stacking up impressive numbers when it comes to customer additions. In Q1 2023, the company reported adding 30,100 new customers while Q2 2023 saw 39,000 new customers. Going by that trend, I expect Q3 to bring in at least 30,000 new customers to bring the overall customers count to about 380,000. That would represent a 55% jump YoY from the 246,000 customers the company had at the end of Q3 2022.
Trend Is Not Your Friend Here
The trend I am talking about is for the stock as well as the company and its current operating environment. Let's start with the current macro environment.
Going green, as noble and sustainable as that sounds, has always been a bit expensive, especially in the initial setup stages. The cost factor is getting worse in general and more specifically because of high interest rates . And there is the big political cloud hanging over these stocks always, with potential attacks on clean energy bills and legislations.
Hence, it should not be a surprise that the stock is down:
- 44% in the last year
- 42% YTD
- 38% in the last 6 months
- 25% in the last month
Personally, I don't see enough catalysts in the current environment to warrant much optimism about a turnaround.
Swimming In Debt While Cash Burns
- Sunnova's debt has been going up every single quarter since September 2019 when it was at $1.11 billion and has since ballooned to $6.12 billion. In addition to going up almost 6 folds in 4 years, the current debt is also 5 times the company's current market capitalization. That is always a warning sign.
- As a result of the increasing debt, Sunnova's interest expense on debt has been going up as well. In the last three reported quarters, Sunnova has paid $214 million towards interest expense, which is about 1/6th of the company's total worth at this point.
- It is not uncommon for companies to carry a large debt load when they don't want to burn through their cash pile, when one exists. But Sunnova falls short here as well as the cash and equivalents reported at the end of June 2023 quarter ($187 million) fell nearly 50% from the $360 million reported at the end of December 2022.
- In short, this torrid combination of burning cash, increasing debt, and as a result, high interest payments cannot continue for long before the company's going concern assumption comes under serious scrutiny.
Diluting Away
With sky-high debt and the cash situation, it is not a surprise that Sunnova has turned to the market to help fund its operations. Total shares outstanding has gone up from 86.76 million in July 2019 to 122.27 million in August 2023. That's a 40% increase in 4 years and in a simplistic way, that means every dollar that the company makes now is worth a little more than half of what it was 4 years ago.
Technically Weak
Given the stock's price action trend covered above, it is not a surprise that it is technically weak as well. The stock lacks any semblance of support as it is 50% to 60% away from its 100- and 200-Day moving averages. Each of the averages shown below are progressively lower, which is another indication that the stock is on a strong downtrend with no end in sight yet.
NOVA stock's Relative Strength Index [RSI] is surprisingly still in 40s and I expect this to go into the oversold zone (<30) given the expectations around interest rates and the market's recent wobble.
NOVA RSI (barchart.com)
Conclusion
I really would like to see renewal energy companies thrive in the long term. But to get there, they must survive in the short term. Sunnova's revenue and customer growth are impressive but the company is clearly facing internal and external challenges. Outside of the current macro challenges and constant (potential) political threats, Sunnova's own strategy is not without questions as the company leases its equipment over long-term to homeowners and businesses. While that may sound like a good way to ensure recurring revenue, it has its pitfalls including the time it takes to fully recognize a contract's value as well as the spending health of the consumer throughout the lease period.
Overall, I reluctantly rate the stock a "Sell" here as I believe the stock will head lower in the medium term.
For further details see:
Sunnova Energy: 5 Things To Know Ahead Of Q3 Report