Sunrun Stock: This Rally Is Not Sustainable (RUN)

Funding Thesis

Sunrun Inc (NASDAQ:RUN) had beforehand introduced an fascinating partnership with Ford (F) in Might 2021, for the latter’s newly launched F-150 Lightning electrical truck. By way of the strategic partnership, Ford encourages its drivers to set up RUN’s photo voltaic panels with Ford Clever Backup Energy, together with its Ford Cost Station Professional and residential integration system. The built-in system would have the ability to cost the EV whereas additionally providing one other residence backup power supply by the car’s battery.

Apparently, Ford is among the many first few automakers to introduce an EV that provides a bi-directional charging option. Tesla (TSLA) has beforehand been proven to be against it and voided the car battery’s guarantee if the proprietor was discovered to be utilizing their car “as a stationary energy supply.” With a number of automakers reporting strong shopper demand and large backorders for his or her EVs regardless of the rising inflation, we’re of the opinion that the good mixture of EVs, photo voltaic panels, power storage programs, and bi-directional charging capabilities are the long run.

The global EV market is anticipated to develop tremendously from $246.7B in 2020 to $1.31T by 2028, at a CAGR of 24.3%, with the US market accounting for 10.56% of total demand then. Mixed with the huge increase from Biden’s recently lifted solar tariffs and California’s delay in solar subsidy reform, we count on to see RUN document elevated development for the subsequent two years. That is naturally on prime of the frequency and severity of natural disasters within the US in 2021, considerably aided by the elevated electrical bills for the approaching winter.

RUN Will Proceed To Profit From The Inexperienced Initiatives – Profitability Stays Elusive

In FQ2’22, RUN reported revenues of $584.6M and gross margins of 15.3%, representing a rise of 45.71% although a decline of -2.7 share factors YoY, respectively. In distinction, the corporate reported slight enhancements in profitability within the newest quarter, with web incomes of -$12.4M and web revenue margins of -2.1% within the newest margins, indicating YoY development of 69.9% and eight.2 share factors, respectively.

The principle motive for RUN’s lack of profitability is its elevated working bills of $234.4M in FQ2’22, representing a rise of 9.53% YoY or 213.21% from FQ2’19 ranges. Given the slender gross revenue margins, the corporate reported an unsustainable ratio of 40.1% in bills to its rising income and 261.8% to its gross earnings within the newest quarter.

In FQ2’22, RUN additionally reported elevated long-term money owed of $7.42B and curiosity bills of $48.67M, representing YoY development of 38.17% although a moderation of -44.34%, respectively. These have straight coincided with the expansion of its web PPE belongings to $10.35B and capital expenditure to $0.52B within the newest quarter, indicating a rise of 16.16% and 30% YoY, respectively. Mixed with its elevated stock ranges of $547.42M, these investments would ultimately be top-line accretive, because of the large world shift in the direction of renewable power because of the record-high oil/gasoline costs and electrical energy payments.

Buyers additionally needn’t fear about RUN’s liquidity over the subsequent few quarters, since solely $927M of its money owed might be maturing by 2024 and $550M by 2025. Nonetheless, it’s somewhat probably that extra debt leveraging is important for refinancing then.

Nonetheless, given its worsening profitability and aggressive Capex, RUN reported a decrease Free Money Movement ((or FCF)) technology of -$716.1M and an FCF margin of -122.5% in FQ2’22. It represented a decline of -25.6% although a moderation of 19.6 share factors YoY, respectively. Within the meantime, the corporate seems to be effectively poised for the worsening macroeconomics, with first rate money and equivalents of $863.1M within the newest quarter.

Because of this, RUN continues to depend on Inventory-Primarily based Compensation (SBC) with $26.65M reported in FQ2’22. Although this will seem to be a decline of -38.67% YoY, buyers should be aware that the corporate reported an eye-watering sum in SBC bills of $418.13M up to now eight quarters, with deepening web losses of -$311.5M on the identical time. Mixed with its $3.2B all-stock acquisition of Vivint in July 2022, long-term RUN buyers have been simply diluted by 82.37% since FQ2’19. In any other case, 207.94% since its IPO in 2015.

For now, these numbers nonetheless look comparatively managed for a rising firm. Nonetheless, since RUN isn’t anticipated to report profitability by FY2024, we’ll probably see reasonable development in its share depend forward. Buyers, take be aware.

Over the subsequent three years, RUN is anticipated to report first rate income development at a CAGR of 18.27%, whereas remaining unprofitable with web incomes of -$29.81M by FY2024. A persistent money burn is clear for the corporate, given its worsening web revenue margins from 3.1% in FY2019, to -4.9% in FY2021, and eventually to a projected -11.98% by FY2024.

For FY2022, RUN is anticipated to report revenues of $2.15B and web incomes of -$137M, representing a rise of 33.97% although a decline of -72.5% YoY, respectively. Regardless of its place as a leading solar company within the US, it’s unlucky that RUN continues to be affected by slender revenue margins and elevated working bills over the subsequent three years.

So, Is RUN Inventory A Purchase, Promote, or Maintain?

RUN 5Y EV/Income and P/E Valuations

RUN is at present buying and selling at an EV/NTM Income of seven.42x and NTM P/E of -81.79x, decrease than its 5Y imply of 8.75x and 428.06x, respectively. The inventory can also be buying and selling at $37.05, down -38.86% from its 52 weeks excessive of $60.60, although at a premium of 220.53% from its 52 weeks low of $16.80. Consensus estimates stay bullish about RUN’s prospects, given their value goal of $47.10 and a 27.13% upside from present costs.

RUN 5Y Inventory Value

Given the multitude of things mentioned above, we surmise that there are higher and extra worthwhile inexperienced power performs on the market, corresponding to Enphase (ENPH). In any other case, a extra speculative play based mostly in China, corresponding to Daqo New Energy (NYSE:DQ), if one is up for some geopolitical volatility.

Within the meantime, the bulls could proceed holding the inventory, because the latest rally could maintain over the subsequent few weeks earlier than totally digested together with the worsening macroeconomics by H1’23. Buyers eager on trimming their positions could doubtlessly achieve this at present ranges as effectively, since we count on to see a reasonable retracement as soon as the Fed hikes rates of interest on 21 September and November 2022.