2023-12-28 14:30:00 ET
Summary
- Sunnova Energy is well-positioned to capitalize on the US residential solar market with its network of regional dealer-installers.
- The company's Q3 results were in line with expectations, and it has reaffirmed its guidance for 2023 and 2024.
- Sunnova is expected to continue experiencing rapid sales growth, supported by expansion into new markets and the Inflation Reduction Act.
Thesis
Sunnova Energy International Inc. ( NOVA ) is a leading provider of residential solar and energy services. The company is well-set to capitalize on a significant market opportunity with its exclusive network of regional dealer-installers. I believe NOVA can continue to grow at a high double-digit rate, given diversification away from California and an accelerating energy transition. At current levels, I find the valuation attractive, especially when considering its earnings growth rate has exceeded 50%. Hence, I remain positive and assign a buy rating to the stock.
Q3 Review and Outlook
NOVA's third quarter result was mostly in-line with the market estimates. Although NOVA's Q3 results fell short of expectations, there were several positive takeouts from the quarters. The management reaffirmed their guidance for 2023, and the forward guidance for 2024 was robust. The company expects its customer additions for the fiscal year 2023 to be towards the upper end of the previously provided guidance range of 135,000 to 145,000 customers. NOVA has also reaffirmed its guidance for the fiscal year 2023, including PF EBITDA of $235-255 million, solar loan customer principal payments of $150-190 million, and interest income of $110-120 million. Additionally, NOVA has issued guidance for the fiscal year 2024, projecting customer additions of 185,000-195,000, which implies approximately 36% year-over-year growth at the midpoint of the guidance range.
Rapid Sales Growth To Continue In The Future
Although sales of residential solar have experienced a slowdown for most companies, NOVA is set to post a sales growth of over 30% in 2023. I believe NOVA can sustain this growth momentum going forward in the near-term due to significant tailwinds, including the company's expansion into new geographic markets outside of California and support from the Inflation Reduction Act. NOVA stands today as a leading player in the United States's residential solar market and has seen rapid growth in solar capacity additions in the US. Solar installations are expected to reach over 30 GW this year, and I believe the fast growth will continue from 2024 to 2026 since there is still a very large market that stands untapped. As of 2023, roughly 4% of households in the United States have rooftop solar as of 2023, and I believe there is significant potential for this to increase to about 20% over the next decade.
Moreover, NOVA's sales growth can be further supported by higher battery sales. In the third quarter, approximately 15% of their customers chose to add battery storage to their solar systems, and I anticipate this trend will continue, especially in California, as California's NEM 3.0 (net energy-metering) policy boosts incentives for solar plus battery storage while reducing subsidies for solar-only projects.
US Solar Capacity
Financial Outlook & Valuation
Sunnova's sales have experienced substantial growth over the past few years, increasing about six times since the company's IPO in 2019. I expect the high-growth trend to continue in the near-term as several factors, such as the company's diversification away from California, strong policy support from the Inflation Reduction Act, and the accelerating transition towards cleaner energy sources, continue to provide a solid foundation for growth. I expect California solar demand to decline in 2024 as the state lowered solar export rates under NEM 3.0; however, the potential growth in battery storage deployment should partially offset any solar volume decline, in my view.
The company's EBITDA outlook has improved since Congress passed the IRA, and I believe NOVA can post higher margins going forward in the near term, assuming decreasing module costs, strong demand, and continued policy support. Sunnova's shares are trading at approximately 9.5 times the forward EV/Sales ratio as per Capital IQ estimates, significantly below the company’s five-year historical forward EV/Sales multiple of 17.5x. Although NOVA is currently trading above peers like Sunpower and Sunrun, I believe the premium is justified given the company’s higher revenue growth and better prospects of sustaining growth in the medium term. At current levels, I find the valuation attractive, especially when considering the company's earnings growth rate has exceeded 50%. Hence, I remain positive and assign a buy rating to the stock.
Capital IQ
Investment Risks
The company's growth relies on its ability to secure funding from external investors to finance the development of rooftop solar systems and storage solutions that enable them to provide Sunnova customer service. Any disruption in the capital markets could potentially hinder the company's growth compared to what is expected. Moreover, if equipment costs go up due to issues in the supply chain or changes in US trade and renewable energy policies, it could lead to higher expenses for solar systems.
One additional risk that the company faces is the slowdown in the market growth of the residential solar market relative to expectations. Until solar can compete with traditional energy sources on a standalone basis, the solar market needs a supportive political and legislative environment in order to meet/exceed growth expectations over the next decade. Currently, the installations of solar systems is partially funded with tax savings via ITC and other programs, and if the availability and the size of government subsidies and incentives subside, it would hinder the adoption of solar systems.
Conclusion
NOVA is a fast-growing company operating in the residential solar market. I believe the company has strong momentum on its side, driven by the company's expansion into lucrative markets and push from the inflation reduction act, which I believe will sustain NOVA's high double-digit growth rate in the near-term. Given the company's high earnings growth rate, I believe the current valuation is reasonable and assign a buy rating to the stock.
For further details see:
Sunnova: Top Pick In The Residential Solar Market