After Strong Rally, Sunrun Stock Could See 20% Pullback

Sunrun stock (NASDAQ: RUN) is up more than 3.5x since the beginning of 2020, but at the current price of $53 per share, we believe that Sunrun stock has around 20% potential downside.

Why is that? Our belief stems from the fact that Sunrun, a provider of residential solar panels and home batteries, saw its stock rise more than 6x from the low seen in March 2020. Further, after posting mixed full-year 2020 numbers, it’s clear that Sunrun did not benefit from the pandemic. Our dashboard What Factors Drove 798% Change In Sunrun Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Sunrun stock’s rise since late 2017 came due to a 73% jump in revenues from $533 million in FY 2017 to $922 million in FY 2020. However, a 33% increase in the outstanding share count weighed on revenue growth, leading to RPS (revenue-per-share) rising by only 31% in comparison, from $5.05 in 2017 to $6.59 in 2020.

Sunrun’s P/S (price-to-sales) ratio meanwhile rose from 1.2x in 2017 to 1.8x in 2019, before racing to 10.5x in 2020, riding the rally in solar stocks. It has since fallen to 8x currently, as the markets are pulling back from recent highs. However, given Sunrun’s mixed full-year 2020 results, there is further downside risk for the company’s P/S multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns hampered solar module demand in the first half of 2020. However, the switch to solar as a cheaper source of energy has risen since, and this is evident from Sunrun’s full-year 2020 revenues. Sunrun’s revenue came in at $922 million for FY 2020, up from $859 million in FY ’19, driven primarily by a $100 million rise in customer agreements. However, Sunrun’s expenses in 2020 have soared, and despite steady revenue growth, operating loss more than doubled from $216 million to $465 million. This hampered overall profitability and EPS dropped to -$1.24 for FY ’20.

With the economy opening up and people’s interest in solar energy rising, we expect steady revenue growth for Sunrun in the medium term. However, if the company is unable to control expenses, it will be a while until profitability recovers to FY 2019 levels. We believe this could lead to the stock seeing its P/S multiple decline from the current level of 8x to around 6x, which even when combined with a rise in revenue per share, could result in the stock price shrinking to as low as $42, a downside of 20% from the current price around $53.

While Sunrun stock may not seem attractive, 2020 has created many more pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Honeywell vs Roper Industries. 

 

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