Companies part of the solar energy segment have grossly underperformed the broader markets in 2021. For example, while the S&P 500 Index has surged by 24.6% year-to-date, Sunrun (NASDAQ: RUN) stock is down 50% since the start of 2021.
Sunrun is a company valued at a market cap of $7 billion. It is engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems in the U.S. The billion-dollar entity also sells solar energy systems and products that include panels and racking as well as solar leads generated to customers.
Sunrun offers battery storage with solar energy systems and its primary customers are homeowners. It sells products through a direct-to-consumer approach across online retail, mass media, digital media as well as its partner network.
Despite the recent pullback in RUN stock, it has more than tripled in market value since its IPO six years ago. Let’s see if Sunrun should be part of your portfolio right now.
The bull case for Sunrun
Sunrun has increased its revenue from $529.7 million in 2017 to $922.19 million in 2020. In the last 12-month its sales stood at $1.49 billion. The global shift towards clean energy solutions should positively impact the top-line of Sunrun and peers in the upcoming decade.
The company added 30,698 customers in Q3, bringing the total number of customers to 630,441, indicating a year over year growth of 20%. Its annual recurring revenue stood at $787 million with an average contract life remaining of 17.3 years. Sunrun ended Q3 with net earning assets of $4.5 billion and $941 million in cash.
Sunrun emphasized that the residential solar market is massive and remains unpenetrated. In case the industry can grow its customer base by 15% each year in the next decade, it will still penetrate just 17% of the households in the U.S.
Sunrun is the number one player in the U.S. residential market and accounts for less than 1% of the total electricity market in the country. At the end of Q3, Sunrun accounted for 3% of residential solar penetration in the United States.
Sunrun is part of a nascent but rapidly expanding addressable market. It is well poised to benefit from multiple secular tailwinds, given the fragmented nature of this industry, customer subsidies and no advanced product offerings from peers.
The costs of solar modules and batteries have declined significantly in the last decade and this trend is likely to continue going forward. According to market experts, the cost of installed solar panels will fall by 34% and the cost of batteries will decline by 64% in the next 10 years.
Risks associated with RUN stock
Last week, California regulators disclosed plans to revise the current net metering (NEM) framework which will be replaced with a net billing tariff. Solar companies including Sunrun have however warned that these changes could increase the prices of rooftop solar in the state of California.
Following the news, investment bank KeyBanc downgraded RUN stock from “Overweight” to “Sectorweight”. In the last five trading sessions, RUN stock has lost over 20% in market value.
Analysts tracking Sunrun expect the company to increase sales by 71.6% to $1.58 billion in 2021 and by 15.5% to $1.83 billion in 2022. Its adjusted loss per share is focused to narrow from $1.06 per share in 2020 to $0.36 per share in 2022.
RUN stock is still unprofitable and is valued at a forward price to 2022 sales multiple of almost 4x which is expensive, especially if its sales estimates are not met in Q4 and beyond.
The final takeaway
Sunrun is a solid long-term bet given its expanding addressable market, improving bottom-line and pullback in its stock price. Analysts tracking RUN stock expect it to more than double in the next 12-months, making it a top bet for contrarian and growth investors.
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