Summary
- Until Q3, RUN’s track record during earnings season was pretty dismal.
- We touch upon some important metrics to note during Q4 earnings.
- RUN is cheap relative to its historical average, but compared to other options that have better topline potential, it comes across as pricey.
- The risk-reward on the charts looks good.
Sunrun, Inc. ( RUN ), a play on the US residential solar energy market will publish its Q4 results on the February 22, after market hours. Here are a few important points worth noting ahead of the event.
Earnings Event - What To Consider
Sunrun is not for the faint-hearted as it tends to deliver some pretty drastic surprises during earnings season, and positive surprises have been few and far between. Just for some context, over the last 12 quarters, RUN has failed to meet street estimates 75% of the time. In fact, the huge positive EPS beat (a beat of over 1 dollar and 3 cents) in Q3-22 , was an aberration of sorts, and was incidentally the best-ever performance over the last three ye ars ! Otherwise, over the last three years, RUN has come up short by -0.06 on average. It's worth noting that for Q4-22, consensus is currently expecting a negative GAAP EPS of -0.27 .
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Since mid-2020, RUN's revenues have grown sequentially across all quarters except for Q4-21. Now it looks like RUN could be on the cusp of another brief slowdown over the next two quarters. In Q4, analysts are expecting a revenue figure of only $592m (implied decline of -6.3%), and this will likely slow even further in Q1-23 to $585m (implied decline of -1.2%).
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Investors should watch out for the trend of RUN's installations of solar energy capacity which had taken a bit of a beating in Q3; after witnessing YoY growth of 27%, and 33% in Q1 and Q2, the run-rate slowed to just 17% in Q3. Having said that, also consider that Q3 installations were also adversely impacted by inclement weather conditions in Puerto Rico and Florida, and it's not something that will be repeated in Q4, so expect an uptick to the 20-25% levels in Q4.
The IRA act has done a world of good for RUN's prospects, and the higher investment tax credit ((ITC)) of 30% for solar subscribers should help drive greater impetus for RUN's solar subscription model. Note that in Q3, 71% of the total new customers added consisted of subscribers. In Q4 and the quarters ahead, this proportion of subscribers as a function of total customers should inch up.
The increased ITC from 26% to 30% has also been instrumental in driving a significant increase in RUN's net subscription values in the recent quarter (management believes this could be over $1000 per customer). Previously , management had been guiding for net subscription values of around $10,000 in H2-22 but in Q3, it came in at an impressive $13,300, and in Q4, investors should expect even further sequential progress from the Q3 levels.
A superior ITC isn't the only factor driving superior net subscription values. RUN is also benefitting from pricing increases taken to offset inflation and higher financing costs, and the impact of this is expected to be reflected positively in Q4 as well.
Meanwhile on the cost front as well, RUN has been doing a great job as they lever their scale effects (installation volumes are growing at 3x the pace of headcount additions) to keep G&A subdued (down 6% in Q3)at $1100 per customer, an all-time low. All in all, investors would do well to keep an eye on creation costs (things like installation costs, G&A, sales and marketing, etc.), as a proportion of subscriber value (not net subscriber value). Before Q3, this metric had averaged around 80-81% of subscriber values, but in that quarter it fell dramatically to 69.5% on account of the factors discussed above.
Earnings presentations
Going forward, in 2023, the growth in subscriber value may not be as robust as Q3 and potentially Q4, as management is likely to increase the discount rate used to calculate subscriber values on account of a higher -than-expected interest rate trajectory in 2023 (note that Sunrun's discount rates are not adjusted every quarter, but typically, once a year).
Investors should also look out for management clarity with regard to the passage of NEM 3.0 by the California Public Utilities Commission (CPUC) in mid-December, which is due to come into play by mid-April 2023. What's troubling is that under NEM 3.0, the average export payment for transferring excess energy back to the grid will be 75% lower than what it was under NEM 2.0. However, there is an option for solar owners to grandfather a new solar system back into NEM 2.0 rates for 20 years provided they submit an interconnection application before April 14, 2023. On account of this clause might we see a big spurt in RUN's Q1 backlog and installations for what is a very important market for them?
RUN management could likely also touch upon developments with Lunar Energy, a clean energy tech firm in which the former has a 37% stake, and also preferential tech access. The latter has been developing a combined battery inverter and software system that enables homeowners to generate, store, and share their own clean energy within a broader clean energy community. Interestingly enough, this product will go live sometime this year, and more clarity on commercialization timelines would be much appreciated.
We previously noted RUN's burgeoning EV opportunity with Ford. Recent battery-related encumbrances linked to the F-150 won't reflect well on sentiment, as Ford's 2023 targeted production of this product was initially poised to double YoY. RUN was previously receiving strong traction on cross-sells and bundling on account of installations linked to the Ford Charge Station Pro , and the Home Integration System and one would be curious to see if there's been a shift of late?
What Do The Valuations Look Like?
Prime facie, on an EV/Sales (FY24) basis, Sunrun's valuation multiple (5.11) may make it an attractive bet, as it trades at a 20% discount to the long-term average.
However, I would also urge investors to consider the comparable valuation and revenue growth trajectories of other options in this space. RUN's FY24 annual revenue growth will only come in at ~11.5%, the lowest amongst its peers, who on average are poised to generate ~23% revenue growth for that period. Considering that, RUN's premium forward EV/Sales multiple (10% higher than the peer set average) does not feel right.
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Closing Thoughts - What Do The Technicals Look Like?
As a rotational play in the solar space, RUN appears to be a promising bet. The image below gives you a sense of how oversold RUN looks relative to its peers in the solar space (the RS ratio is ~53% away from the mid-point of the long-term range.
On RUN's own chart, there are a couple of key takeaways. Firstly, the descending channel which was in play since Jan 2021, came to an end in late July 2022, with a strong green candle breaking past the upper boundary of the channel. With time we learned that this was a false breakout but if you're looking for silver linings note that price action has not fallen back into the old channel, implying a certain degree of strength.
It also helps that the risk/reward looks quite favorable at the moment. We can see that since late 2021, the stock has been chopping around within a range of $20-$40 attempting to build a base. If one were to consider a long position at this juncture, using the $20-$40 barriers as your trading range, the reward to risk works out to a healthy 3:1.
For further details see:
Sunrun: What To Consider Ahead Of Q4 Earnings?