2023-07-06 06:50:25 ET
Summary
- Despite a successful Q1 2023, Sunrun's valuation remains high, posing a risk for share compression if future quarterly reports disappoint.
- The company, a leader in the rooftop solar and energy storage service market, faces potential headwinds such as the reduction of compensation for net metering in California.
- Sunrun's balance sheet shows liabilities nearly three times higher than its market cap, and its high debt level could hinder future growth and market expansion.
Investment Rundown
Despite the very successful quarter that Sunrun Inc. ( RUN ) had to start in 2023 the valuation remains incredibly rich, which opens up a very potential risk for share compression if a quarterly report misses estimates or in any other way disappoints. Being a leader in the rooftop solar and energy storage service market has led the company to grow massively as the demand has in just the last few years exploded. The US residential market for solar panels remains largely underpenetrated, despite the large growth it has seen recently. With only around 4% penetrated this leaves RUN with a massive market opportunity they can leverage to help grow both the top and bottom lines.
But some significant headwinds could challenge demand for solar in the short term - medium term. California is one of the largest markets for residential solar the news of NEM 3.0 isn't a tailwind for RUN, but potentially quite the opposite. The share price has been in a steady decline for the last 12 months and with still an unreasonably high p/e I think that RUN presents too much risk right now to start a position. I think it should be rated a sell until we see a positive net margin and one that is consistent too.
Company Overview
Sunrun Inc. is a prominent US-based company specializing in residential solar energy solutions. Its primary focus is to offer homeowners clean and cost-effective solar energy options. Sunrun provides comprehensive services for solar panel installations, including financing choices and maintenance, ensuring a convenient transition to solar power for its customers.
Market Position (Investor Presentation)
What might go a little unnoticed is that RUN accounts for an impressive 66% of the subscription market share of TPO or solar leases & PPAs. I think this is what will be carrying a lot of companies in the future as the sustainable revenues teams it provides will ultimately end up creating strong FCF and better margins for businesses. But it's also a way to fund new ventures and projects to build out a portfolio of solar assets. Over the last few years as well the cost of installing solar panels has gone down drastically. From 2010 levels it has decreased by 65% according to RUN themselves.
NEM 3.0 News
One of the main appeals for solar panels is that houses that had installed them could earn some income by selling excess energy generated from them. This is called net metering or NEM for short. The excess electricity would end up being dispersed to the grid and benefit other homes instead.
Back in December of 2022, there was some negative news however that affected people having already installed or were thinking about installing solar panels to get some benefit from this. The NEM 3.0 will reduce compensation by 75% which reduces the incentive to get solar panels, and in turn, hurts sales for RUN.
Regional Sales (Earnings Presentation)
The company does have a significant presence in California and the coming quarters will likely be a challenge in the region as the NEM 3.0 took effect on April 15, 2023. Going into Q2 FY2023 a key component to watch will be the development in the California revenues. But this doesn't seem to affect the outlook for 2023 that much, as the Net Subscriber Value is still expected to rise in the second half and be noticeably higher than the average of $12,000 in Q1 FY2023 .
Risks
The main risk with investing in RUN right now is simply that they aren't yet profitable. The company had noticeably higher losses in the most recent quarter then compared to a year ago. The EPS went from $(0.42) to $(1.12) which is the cause for the 23% decline the share price has had during those 12 months. With a negative bottom line this means RUN isn't trading based on fundamentals, and until the company archives steady and positive margins I think it's a risky speculative stock to invest in right now.
Earnings Result (Seeking Alpha)
To highlight the risk that is associated with RUN we just have to look at the balance sheet briefly. Seeing the total liabilities nearly 3x higher than the market cap is worrying. With $7.7 billion in non-recourse debt, the priority for RUN will have to be to spend earnings on improving its financial status. That could hurt potential market expansion and leave RUN slacking behind competitors.
Financials
As stated in the risk segment here, some of the most prominent risks with RUN can be found on the balance sheet right now. I think RUN is right now very leveraged and this makes investing very risky. The net debt/EBITDA ratio is far above the threshold of 3 which is preferred. Negative EBITDA makes RUN likely to have significant issues with paying off debt in the short-medium term without the aid of share dilution. This is a practice they have utilized through the last several years, as shares outstanding have increased by nearly 100% since 2018.
Balance Sheet (Earnings Report)
Final Words
Right now the valuation for RUN seems unreasonably high, even if you account for the large amount of growth they are having. You still need to be realistic in terms of an investment, and when a company isn't trading based on fundamentals there is a large amount of risk that investors have to take on as a result.
The balance sheet of RUN looks risky as the debts have grown into a very large position and I think paying this back will suppress future growth as more capital will need to be diverted to these endeavors rather than funding expansion. That makes future earnings for the company come into question as capital to fund it might not be available. I think however RUN will have a very bright future ahead as it grows somewhat on the back of the renewable and solar trends. As far as investment goes, I find there to be better options out there in the market that are trading based on fundamentals and not something else. As stated in the first paragraph, I don’t think RUN stock is even a hold until we see solid margin improvements, therefore, until then I will be rating it a sell.
For further details see:
Sunrun: A Premium Way Too High To Pay For