2024-01-02 10:34:23 ET
Summary
- Sunrun Inc. is the largest provider of residential photovoltaic services in the United States.
- They have achieved significant revenue growth in recent years, but have negative cash flow and significant debt.
- They have been shifting their business model into one which emphasizes incorporating a storage component in their installs. This should help their margins.
- I presently rate RUN as a Hold.
Thesis
I have been watching several players in the solar industry in hopes of making a long-term invest. However, most of the panel manufacturers and installers are saddled with low gross margins and do not currently appear to be capable of becoming attractive long-term compounders.
Sunrun Inc. ( RUN ) caught my attention because of their impressive revenue growth, but their financial situation is far too unattractive for me to seriously consider them as an investment. They have been shifting their business model into one which emphasizes incorporating a storage component in their installs. This should help them improve margins; it may be enough to get them to positive cash flow.
This is an update to the article I wrote last August . After looking over their financials and valuation, I presently rate Sunrun Inc. as a Hold.
Company Background
Sunrun Inc. was founded in 2007 and is the largest provider of residential photovoltaic services in the United States. Their business model has them installing and maintaining solar systems. They typically enter into 20 or 25 year power purchase agreements with their customers. This removes a significant amount of risk from their customers and shifts it onto Sunrun. They provide comprehensive products and services including panels, racking, and battery storage. The company is currently headquartered in San Francisco, California.
Long-Term Trends
The global solar panel market has an expected CAGR of 18% through 2030. The United States solar energy market is expected to experience a CAGR of 16.48% until 2028.
The levelized cost of solar has been lower than non-renewables since 2015. It also fell below the cost of wind in 2018 or 2019. This is financially incentivizing us to prioritize installing solar over all other potential energy types.
Levelized Cost Of Electricity (Lazard, Dan Gearino, Insideclimatenews.org)
Guidance
Their most recent earnings call transcript can be found here . I am merely going to highlight some of the more important parts from the transcript so investors are encouraged to go read it. I should note that this earnings call took place before the Fed gave us guidance that they were planning on cutting rates in 2024.
Sunrun is shifting their business model to one which relies more on energy storage as a part of the comprehensive packages they provide. They are shifting away from operations which don't include a storage component, citing that they have subpar economics. They also stated that they increased cost reduction efforts, and are actively choosing to not chase after low-margin volume.
Guidance 1 (Q3 2023 Earnings Call Transcript)
The shift toward emphasizing storage is motivated by the higher margins they provide to Sunrun. They have increased their storage component to 33% of installs, which is up from only 15% at the start of the year.
Guidance 2 (Q3 2023 Earnings Call Transcript)
They installed an additional 6.5 GW of solar capacity. This came in slightly below the midpoint of the range of their previous guidance.
Guidance 3 (Q3 2023 Earnings Call Transcript)
They expect to achieve between 220 and 245 MW of additional solar capacity in Q4. This is slightly below their previous full year guidance for 2023. They are also projecting their storage capacity to have grown between 71 and 78% for the full year.
Guidance 4 (Q3 2023 Earnings Call Transcript)
Annual Financials
The company has managed to rapidly grow its revenue over the last decade. In 2013 they had an annual revenue of $54.7M. By 2022 that had grown to $2,321.4M.
RUN Annual Revenue (By Author)
Annual gross margins reached a peak in 2018 before entering a phase of contraction. This is typical of companies which are prioritizing capturing market share over generating cash flow. As of the most recent annual report, gross margins were 12.87%, EBITDA margins were -7.43%, operating margins were -26.86%, and net margins were 7.47%.
RUN Annual Margins (By Author)
They experienced a significant dilution event in 2015, and another in 2020. Other than those two years, the share count appears to be rather stable. Total common shares outstanding was at 10.4M in 2013; by the end of 2022 that rose to 214.2M. This represents a 1959.6% increase in share count, which comes out to an average annual rate of 217.74%. Over that same time period operating income fell from -$54M to -$623.5M, so this dilution has yet to improve their financial situation.
RUN Annual Share Count vs. Cash vs. Income (By Author)
Similar to their revenue, debt has been climbing dramatically. As of the 2022 annual report, they had -$256.1M in net interest expense, total debt was $8,873.8M, and long-term debt was $8,249.6M.
RUN Annual Debt (By Author)
While I understand that their rapid growth comes with significant debt increases, it's their cash flow situation which prevents me from making an investment in this company. Their annual negative cash flow has been increasing as they grow their revenue. As of this most recent annual report, cash and equivalents was $740.5M, operating income was -$623.5M, EBITDA was -$172.4M, net income was $173.4M, unlevered free cash flow was -$2,062.4M, and levered free cash flow was -$2,222.4M.
RUN Annual Cash Flow (By Author)
Their total equity rose significantly in 2020, and has been climbing since then.
RUN Annual Total Equity (By Author)
While they have managed to produce positive values for Return On Invested Capital and Return On Equity some years, they have yet to produce positive values for Return On Capital Employed. As of the most recent annual report ROIC was 1.02%, ROCE was -3.34%, and ROE was at 2.12%.
RUN Annual Returns (By Author)
Quarterly Financials
Their quarterly financials are showing that revenue has been dropping since Q3 2022. I believe this is due to elevated interest rates so as rates decline, demand for new solar installs is likely to recover. Eight quarters ago Sunrun Inc. had a quarterly revenue of $438.8M. Four quarters ago that had grown to $631.9M. By this most recent quarter that had declined to $563.2M. This represents a total two-year increase of 28.35% at an average quarterly rate of 3.54%.
RUN Quarterly Revenue (By Author)
They do appear to have some amount of seasonality with their quarterly margins. Sunrun typically experiences higher than average gross margins in Q2 and Q3 and lower than average during Q1 and Q4. As of the most recent quarter gross margins were 8.03%, EBITDA margins were -9.00%, operating margins were -33.65%, and net margins were at -189.90%.
RUN Quarterly Share Count vs. Cash vs. Income (By Author)
Although it appears quite stable when viewed on a bar chart, their share count has been slowly rising. The sum of their last eight quarters of dilution comes to 5.11%; the sum over the last four quarters comes to 2.19%.
RUN Quarterly Share Count vs. Cash vs. Income (By Author)
Their already unattractive debt situation continues to get worse every quarter. The most recent quarter, Sunrun had -$89.8M in net interest expense, total debt was at $10,641.7M, and long-term debt was at $9697M.
RUN Quarterly Debt (By Author)
When viewed on a quarterly basis, their negative cash flow situation is still unattractive. It has been improving since it reached a peak in early 2023. As of the most recent earnings report, cash and equivalents were $644M, quarterly operating income was -$190M, EBITDA was $50.7M, net income was -$1,069.50M, unlevered free cash flow was -$568.80M, and levered free cash flow was -$624.9M.
RUN Quarterly Cash Flow (By Author)
Total equity was rising very slowly until it dipped this most recent quarter.
RUN Quarterly Equity (By Author)
Similar to what showed up on their annual financials, their ROIC and ROE occasionally reach positive values while their ROCE stays consistently negative. As of the most recent earnings report ROIC was -6.04%, ROCE was -0.99%, and ROE was -15.12%.
RUN Quarterly Returns (By Author)
Valuation
As of January 1st, 2024, Sunrun Inc. had a market capitalization of $4.28B and was valued at $19.63 per share. With them not producing positive cash flow I can't produce an estimate for intrinsic value using a discounted cash flow model. Even more disheartening, without them producing positive EBITDA, or even Adjusted EBITDA, I can't even produce an estimate using the PEGY method. They are currently trading at a forward EV/Sales of 6.90x, a Price/Sales of 1.88x, and a Price/Book of 0.70x.
RUN Valuation (Seeking Alpha)
RUN Growth (Seeking Alpha)
They are currently trading with a book value per share of $25.77 and a tangible book value per share of $11.43. With the current share price of $19.63, they aren't anywhere near cheap enough to buy as a cigar butt play.
I am a growth oriented value investor. With them currently experiencing significant negative cash flow and operating margins, I view the company as presently overvalued. Even when shifting my mindset to view them as a potential liquidation play, they still appear overvalued.
RUN Value Per Share (Seeking Alpha)
Risks
In my last article I stated that Sunrun could expect demand to continue to diminish until interest rates begin lowering. The Fed has since announced they were planning on slowly lowering rates in 2024, and this caused RUN to experience a significant rally. This will help their demand problem, but I do not expect it to help very quickly. In addition to demand for new installs recovering slowly, Sunrun will still have to make payments on their debt.
If they do not minimize their cash burn rate, they may have to raise additional capital. This most recent quarter they had a levered free cash flow of -$624.9M and total cash and short term investments of $708.7M. If they are not able to take on additional debt, they may have to raise cash through a market offering very soon.
Catalysts
The company is blessed with significant long-term tailwinds from the low levelized cost of photovoltaics. This encourages new solar installs and means that I expect for them to experience elevating demand for many years to come.
I am unclear what the long-term potential of their AI software package, or if they plan to develop it further. While they are currently focusing their efforts on residential applications, if they eventually manage to become a significant player in grid-scale electricity arbitrage, it could grant them additional high margin revenue streams. There are currently several companies working toward this goal, so it is unclear to me if Sunrun has the intention to branch into those capabilities.
Conclusions
Although they improved their cash flow situation in the first three quarters of 2023, they are still burning through it quite quickly. Sunrun appears to be on the verge of having to either dilute shareholders to raise cash, or take on additional debt. I do not consider them even remotely investible at this time.
Even though the industry they are in is expected to continue experiencing significant increases in demand in coming years, in order for me to consider an investment into Sunrun they would first have to improve their profitability. With their impressive revenue growth and long-term tailwinds, my standard for an investment here are lower than normal. I would either need to see them achieve positive Adjusted EBITDA or operating income, and this would have to come with guidance that they expect it to stay positive going forward.
While I believe the long-term potential of this company is still positive, they are not in a good situation over the coming quarters. Just like most of the rest of the solar industry, I will continue watching their progress in hopes of eventually finding an attractive investment in this industry.
For further details see:
Sunrun Is Shifting Toward A Storage Model