2023-10-20 10:44:37 ET
Summary
- Sunrun Inc.'s recent struggles in the face of market challenges have raised concerns about its ability to secure favorable cash terms and maintain growth.
- For every $1 of revenues, Sunrun uses around $1.50 of free cash flow.
- With a stretched balance sheet and mounting debt, there is growing skepticism about Sunrun's ability to reach profitability any time soon.
Investment Thesis
Sunrun Inc. ( RUN ) is a company that helps homeowners in the U.S. switch to solar energy easily and affordably, by offering them the option to lease or purchase solar energy systems. They also provide battery storage solutions and prioritize delivering a great customer experience through their diverse partner network and a multi-channel approach.
The problem that Sunrun faces is that not only the business was already struggling for growth already as it headed into 2024, but now, investors got spooked by the SolarEdge Technologies ( SEDG ) surprise negative preliminary earnings .
This will dampen Sunrun's future ability to raise cash on favorable terms. There are just too many hairs on this business.
Sunrun's Near-Term Prospects
Sunrun is a company that specializes in providing clean and affordable solar energy and storage solutions to residential homeowners in the United States. Sunrun has adopted a multi-channel approach, including direct-to-consumer operations and strategic partnerships with various organizations, to efficiently reach a broad customer base.
Their primary services involve lease and power purchase agreements, ensuring stable pricing for solar energy, with an additional focus on customizing solutions for individual homes, fostering long-term customer relationships, and enabling potential expansion into services such as battery storage.
Through their inclusive platform, Sunrun facilitates the integration of specialized sales and installation firms, thereby delivering efficient solar services and fostering significant industry growth.
In the near term, Sunrun's prospects are bolstered by a significant uptick in the adoption of storage solutions, driving higher margins and compensating for temporary decreases in sales volume. With a focus on delivering superior value to customers, Sunrun is positioned to generate substantial annual recurring revenues through strategic pricing adjustments, improved operational efficiency, and ongoing market expansion initiatives.
In a nutshell, that's the bull case. Now, let's dig further into the pesky detractions from the bull case.
Revenue Growth Rates Not Expected to Improve Soon
Sunrun is contending with several challenges that have the potential to impact its operations and financial performance.
One of its challenges stems from the recent increases in interest rates and inflationary pressures, which have led to higher capital costs (more on this soon).
Furthermore, the slower-than-expected recovery in the California market, a significant region for Sunrun, has resulted in lower near-term sales volumes, affecting the overall growth trajectory. This has required the company to optimize its strategies and sales approaches to adapt to the changing market dynamics. Managing the transition period and adapting to the evolving regulatory environment in California have become critical priorities for Sunrun.
Moreover, the increased mix of storage solutions, while offering higher margins, has also extended the installation cycle times, leading to delays in the completion of installations.
This phenomenon has influenced the overall rate of installation completions, impacting the company's ability to meet its volume targets for the near-term.
Also, Sunrun's focus on scaling up storage offerings has presented a learning curve in terms of installation, requiring a strategic approach to streamline processes, however, for now, slower revenue growth rates.
And on top of all this? Yesterday, SolarEdge yesterday spooked the market that its business won't be able to be as profitable as it expected just 90 days ago.
Looking For Sunrun's Cash Flows
Let's look under Sunrun's hood to discuss its cash flow profile. Let me put it this way, in Q2 2023 , for Sunrun to make approximately $600 million in revenues, it burnt approximately $900 million of free cash flow. Put another way, to make $1 in revenues, Sunrun must burn through approximately $1.50 of free cash flow. This is not a viable business model. Period.
Further complicating matters, Sunrun will now be forced to compete on price to make its solar systems more affordable as all its U.S.-based peers will now be competing towards the bottom line in an effort to gain market share in what will become an even more intensely competitive market.
This will create a further hurdle for Sunrun in generating clean free cash flow as it strives to focus on better and more strategic pricing adjustments.
On top of that, the dynamic nature of the supply chain environment and rising input costs have led to a higher inventory balance, posing challenges to efficient supply management and cost control.
And if that wasn't enough, recall that subsequent to the quarter, Sunrun raised nearly $1 billion via its senior securitization program and subordinated financing.
Altogether, this will leave its balance sheet in an even more stretched position than it already was when it ended Q2 with around $9 billion of net debt. Although, it should be stated that the vast majority of its debt is indeed non-recourse. However, it's still debt that will at some point have to be repaid.
And it's also debt that, when combined with yesterday's announcement by SolarEdge that it will be significantly less profitable than it previously expected, will make investing in this whole sector unpalatable.
The Bottom Line
Sunrun is facing a myriad of challenges that have led to uncertainty about its future prospects.
Despite its focus on delivering a great customer experience, recent events in the market have cast doubts on the company's ability to raise future cash on favorable terms.
Additionally, with several challenges such as increased interest rates and inflationary pressures leading to higher capital costs, a slower-than-expected recovery in the market, and extended installation cycle times for its storage solutions, Sunrun's near-term revenue growth rates are expected to remain sluggish.
Moreover, the recent announcement by SolarEdge has further spooked the market and intensified competition in the industry, making it challenging for Sunrun to generate sustainable cash flow and maintain its competitive position.
As uncertainties continue to mount and the company's balance sheet remains stretched, investors are increasingly skeptical about the long-term viability and profitability of Sunrun Inc., signaling that there might be more lucrative investment opportunities elsewhere in the energy sector.
Incidentally, I've made the case throughout Seeking Alpha that I believe that nuclear energy will be the go-to energy solution to complement government's ambition to get to net zero by 2050.
For further details see:
Sunrun's Solar Squeeze: Cash Woes Overshadow Bright Future