2024-01-21 05:40:55 ET
Summary
- Sunrun's storage attachment rate in Q3 nearly doubled compared to Q2 and exceeded 33% for new installations.
- Sunrun storage business could continue to grow in 2024 as the attachment rate grows.
- For the full year 2023, Sunrun management expects 2% to 5% growth in solar energy capacity installed, compared to previous guidance of 10% to 15% growth.
- Sunrun is a 'Hold' as in 'sideline' as the company's solar growth could be relatively weak in 2024 given the expected weaker U.S. distributed solar residential industry growth this year.
Sunrun Inc. ( RUN ) is one of the largest residential solar companies in the US.
Solar in recent years has become very competitive with other sources of energy, as the average global price of solar modules has decreased 30-40% from the first quarter to the third quarter of 2023.
Given tariffs and various laws, U.S. solar module prices have declined less, down 15% in Q3 2023 versus Q1 2023 as Chinese solar panels account for 0.1% of U.S. solar module imports.
In terms of national average system prices, according to a Wood Mackenzie report, U.S. residential solar power system pricing actually rose 3% year over year from Q3 2022 to Q3 2023 given increases in other costs.
With interest rates higher than where they were a few years ago, demand for residential solar has slowed in recent quarters with the exception of certain states such as California.
In terms of growth, the U.S. distributed solar residential market grew 12% year over year in Q3 2023 to 1.8 GWdc installed, although much of the growth had to do with California which had 735 MWdc installed in Q3 as installations rose in the state given backlogs of sales done before the April 15, 2023 switch to net billing are interconnected.
When excluding the growth in California, the U.S. distributed solar residential market didn't grow as quickly in Q3. In fact, in many parts of the country outside of California and some Northeastern states, solar volumes contracted.
In addition to the headwind due to higher interest rates, worsening sentiment and lower stock prices among sector leaders have been some of the factors for why I think Sunrun stock has not done well in recent years.
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In terms of the future, Sunrun benefits from growing storage, but solar growth could still be slow in 2024.
Storage Growth
Storage has been a bright spot for Sunrun.
Management has said they wanted to transition to be a storage-first company as storage has potential for increased margins, and more value creation opportunities over time.
Thanks to the increasing affordability of storage and management's increased focus on storage, Sunrun's storage attachment rate in Q3 nearly doubled compared to Q2 and exceeded 33% for new installations.
In the third quarter, Sunrun installed 175.6 Megawatt hours of storage capacity, up 131% year over year.
In terms of the future, there is reason to believe there will be higher storage attachment rates, as recent sales have seen over 40% storage attachment rates nationally.
In terms of storage outlook, management expects strong growth for 2023. For full year 2023, management expects 71% to 78% growth in storage capacity growth installed for full year 2023, with storage capacity installed in the range of 180 to 200 megawatt hours in Q4.
Outlook and Slowing Solar Energy Capacity Growth
While storage growth has been strong for Sunrun, the company's traditional U.S. residential solar power business growth has been relatively slow.
In Q3 2023, for instance, Sunrun installed 258.2 megawatts of solar energy capacity, up only 1% year over year.
For full year 2023, management expects 2% to 5% growth in solar energy capacity installed, compared to previous guidance of 10% to 15% growth.
That compares to Wood Mackenzie's estimate of 13% growth in residential solar in 2023, with a lot of the growth due to the California growth as previously mentioned.
In terms of outlook, Sunrun expects solar energy capacity installed to be in the range of 220 to 245 MW for Q4, which is lower than Q3.
In terms of the future, 2024 might not be a strong year for residential solar. Given the overall market, Sunrun could face headwinds in solar this year as well.
In terms of 2024, Wood Mackenzie in a report published December 2023 said it expects the residential solar market in the U.S. to decline by around 12% for the year as it believes installation growth in California and some states in the Northeast will no longer offset declining residential solar sale volumes elsewhere.
Given federal interest rate increases, solar loans have become more expensive, and the higher federal interest rates have as a result been a headwind for sales volumes in many states.
Interest Rates
As a result of inflation and higher interest rates in 2022 and 2023, Sunrun has increased pricing multiple times in those years. Although relatively high utility rate inflation across many states in the United States has given the company some room to increase pricing, it has nevertheless decreased Sunrun's customer value proposition.
As an indication of how interest rates could affect industry competitiveness, the International Energy Agency's calculates that a 5% increase in interest rates results in an around 33% rise in the levelized cost of electricity from wind and solar.
In terms of interest rates, normalizing interest rates could help Sunrun as it could make the cost of Sunrun's products cheaper if a customer chooses to lease as financing costs accounts for a sizable cost of the ultimate product.
With potentially decreasing interest rates in 2024, Sunrun might not have to increase its prices as much or at all, and its products could be even more competitive with utility prices as a result if utility prices continue to increase.
If Sunrun's prices are more competitive, the company could potentially sell more products than expected.
I think if interest rates fall more than expected in 2024, Sunrun's solar business could be better than expected for the year.
Valuation
Like many other solar companies, Sunrun will likely experience hardware deflation costs.
In terms of hardware deflation, management said in its Q3 2023 earnings presentation that they expect to realize over a 20% cost reduction for key hardware over the coming quarters for a hypothetical 7.5 KW solar with a single backup battery system as it works through inventory and new pricing flows through reported costs. In the near term, hardware cost reductions could increase competitiveness and provide margin expansion opportunities.
In the longer term, however, I think deflationary hardware costs could be headwinds that create uncertainty when it comes to the renewal rate assumption in the company's pro-forma net subscriber value.
It remains to be seen whether customers will renew at the assumed rate if the overall system cost is cheaper due to hardware deflation 20 years in the future.
If the renewal rate is considerably lower than expected, Sunrun's gross earning assets renewal period assumption of $3.235 billion using a 6% discount rate as of Q3 2023 might be high, and the net earning assets, pro-forma using 6% discount rate as of Q3 2023 of $4.574 billion might be high as well.
Although Sunrun as of January 19 has a market capitalization of $2.88 billion and the company has growth potential as well, I think the market is using a higher discount rate when calculating the company's present value of the future cash flows.
Given the expected slowing in the U.S. distributed solar residential industry this year and also the uncertainty when it comes to the renewal rate, I rate Sunrun a 'Hold' as in 'sideline'.
If I were to own Sunrun, I would own it in a portfolio with the Magnificent Seven stocks to benefit from innovation.
For further details see:
Sunrun: Storage Is Strong But Solar Is Slowing