Sunrun

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Sunrun is a leading provider of residential solar energy and storage systems in the United States, offering installation and long-term ownership options to homeowners.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Sunrun’s business model revolves around customer acquisition, system design, installation, financing (through various partnerships), and the subsequent management and maintenance of residential solar and battery storage systems.

Business Overview

Revenue Distribution

Sunrun primarily generates revenue through:

  • Customer Agreements and Incentives: This is the largest revenue source, which includes recurring payments from customers who have signed long-term contracts, including power purchase agreements (PPAs) and leases. The contracts include an initial up-front payments at start and then subsequent payments from energy generated by the systems.
  • Solar Energy Systems and Product Sales: Revenue generated from the sale of solar energy systems and related products to customers. This segment includes direct sales, meaning Sunrun manages the installation, and hardware sales through third party sales channels.
  • Product Sales: Sales of solar panels and batteries to end customers or partners through distribution or direct channel.

Industry Trends

The solar energy industry is characterized by significant growth potential and is experiencing strong expansion as consumers become more environmentally conscious and look for ways to lower their energy costs. These trends have led to a greater demand for residential solar installations and battery storage, providing Sunrun a large market for its services. However, the industry is also susceptible to government regulations that can impact demand and prices (such as net metering policies), and also faces supply chain risk, especially due to reliance on rare minerals for solar panel production, along with new innovation and technological disruptions.

Competitive Landscape

The residential solar market is highly competitive and fragmented, with many companies ranging from large national players, like SunPower, Vivint and Tesla, to smaller local and regional installers. Intense competition means it is harder for these companies to establish long-lasting competitive advantages. Key competitive factors include: brand recognition, pricing, the range of product offerings, financing options, the ability to reach customers and install quickly, and also the quality of installation, operation, and performance.

What Makes Sunrun Different?

Sunrun differentiates itself through several strategies:

  • Integrated Business Model: Sunrun has focused on both direct sales and long term leases, meaning that it manages the entire solar system lifecycle itself, from acquisition to maintenance. The company has built up considerable capabilities and expertise in both installation, financing, and long term management.
  • Focus on Recurring Revenue: Through its long term contracts like PPAs and leases, Sunrun has aimed to build a highly predictable source of recurring cash flow and revenue that is less impacted by stock market volatility than other business models in the solar industry.
  • Long-Term Customer Relationships: Sunrun aims to create customer loyalty through high quality service, warranty programs, performance guarantees, and ongoing communication, which can lead to repeat business and referrals.
  • Diversified Partnerships: Sunrun has forged connections with large institutions, financial companies, suppliers, subcontractors, and even government bodies in order to accelerate its projects and reduce costs.
  • Leading in Battery Storage: Sunrun is a major player in battery storage installation, leveraging their expertise in integrating their own products and those of others with solar systems, including offering grid service agreements to utilities that often have higher margins.

Recent information reveals that while Sunrun has seen success in building market share, its revenue has become increasingly reliant on customer agreement sales (leases and PPAs), which have a lower profit margin than direct sales. Also, even though they are not as prone to market volatility as other sales, they bring challenges in future growth potential, as growth needs to focus on new contracts to achieve meaningful growth.

Financial Analysis

Revenue Trends: While SUNRUN’s revenue saw growth from $1.6B in 2021 to $2.2B in 2022, it saw a downturn in 2023 to $2.0B. The recent 9 months ended Sep 30, 2024, show revenue at $1.7B, which annualizes to roughly $2.3B a growth of around 15%. This implies a return to growth, and the company expects to continue to grow in 2025. They also mentioned having higher revenues due to higher interest rates, which are passed down to the consumer. We must remain watchful whether the increased volumes will offset lower margins of subscription revenues.

Sunrun’s main source of revenue is customer agreements (leases and PPAs). This trend is expected to continue and may be further supported by the company’s recent partnership with several real-estate companies. But they also said that they plan to increase sales in products to drive more volume and create opportunities in the market, while recognizing the higher growth potential in the product space compared to leases.

Profitability and Margins: Sunrun’s profitability is quite volatile and shows how difficult the industry is to navigate. Their cost of revenues eats up approximately 60-70% of revenues, even after all the restructuring and operating efficiency initiatives they’ve implemented. In 2022, they had a huge loss of over $1.5B. In 2023, after having some restructuring and other adjustments to their debt structure, they still had large losses of around $800m. However, the latest figures have shown improvement, they had a loss of only ~$50m for the first 9 months of 2024, or an annualized loss of approximately $70m, showing some improvement. The current margin on leases/PPAs is lower than that from direct sales/hardware, which puts into doubt their focus on more recurring revenue. The company has a plan to bring down costs, and their guidance for 2025 includes a growth in profitability. This will depend on the market factors and their ability to realize economies of scale and maintain margins.

The company saw increased expenses due to higher installation costs (related to inflation and supply chain issues), but also increased general and administrative expenses. The company also had increased interest expenses, as well as increased noncontrolling interests, indicating that they have added more financial liabilities in the last year. However, recently they have been focusing on decreasing expenses and have shown that they can cut costs, especially in sales and marketing, and have had success with reducing debt obligations.

Financial Strength and Capital Structure: The debt level at Sunrun is particularly high, at approximately $5.9 billion. The net debt/asset ratio is at 1.46. These high debt levels and reliance on borrowing put Sunrun at a considerable risk in times of high interest rates and high financial costs. Even after the recent restructuring and refinancing, their balance sheet still has considerable debt obligations which will hamper their financial situation.

The company has been making significant efforts to pay down its debt, but it’s uncertain if that effort will succeed, or whether their ability to grow at sustainable rate is hampered by their debt obligations. Their long-term contracts create consistent predictable income, but they also take on a significant amount of long-term debt. That is why they are in the middle of a large restructuring and refinancing. Their financial results also demonstrate that they are still unprofitable in 2024, which should raise some flags to investors.

Cash Flow: As a function of a business plan focused on growing with high costs, their free cash flows are negative.

Recent Concerns and Controversies

Sunrun has faced several challenges recently. They have focused on cutting costs through layoffs and optimizing their sales and operations process. This effort could hurt or improve business depending on the outcome. They have also mentioned their concerns with long term debt, and are actively working to lower their debt burdens.

Understandability

Rating: 3 / 5 Sunrun’s business model, while reasonably clear, has a number of moving parts related to its financing, acquisitions, and partnerships. It also has quite complex accounting standards, and many moving parts that affect earnings. Investors will have to dive into their earnings reports and pay close attention to their guidance and performance, as that is their main source of truth for the company’s value. Their focus on non-GAAP measures can mislead investors and obfuscate the true profitability of the company.

Balance Sheet Health

Rating: 2 / 5 Sunrun’s balance sheet is currently not in the best shape. While they are taking action to reduce their debt and lower their financial obligations, there are still substantial debts and liabilities, and the company isn’t yet profitable. Any misstep in the turnaround and financial market may push them into negative territory, making them a difficult investment. The high reliance on debt could be a problem if it does not convert to profits in the future.