2. Sunrun Inc. (NASDAQ:RUN)
Number of Hedge Fund Holders: 36
Sunrun Inc. (NASDAQ:RUN) was founded in 2007 and is headquartered in San Francisco, California. The company develops and installs residential solar energy systems in the United States. The company reported Q2 revenue of $585 million, up 45.7% year-over-year, beating estimates by $83.7 million. Solar energy capacity installed in the second quarter of 2022 was 246.5 megawatts, up 33% from the prior year quarter. The firm’s management continues to expect growth in solar energy capacity installed to be 25% or more for the full year 2022.
Morgan Stanley analyst Stephen Byrd raised the price target on Sunrun Inc. (NASDAQ:RUN) to $79 from $70 and reaffirmed an ‘Overweight’ rating on the shares. The analyst said that the Inflation Reduction Act will offer the required support to boost decarbonization technologies that are on the verge of being commercially viable.
Among the hedge funds tracked by Insider Monkey, William B. Gray’s Orbis Investment Management held the biggest position in Sunrun Inc. (NASDAQ:RUN), with roughly 13 million shares worth $303 million. Overall, 36 hedge funds were bullish on the stock at the end of June, compared to 37 funds in the previous quarter.
Here is what Horizon Kinetics had to say about Sunrun Inc. (NASDAQ:RUN) in its Q2 2021 investor letter:
“What this table did not cover is valuation. What’s expensive, what’s cheap? A good business that is too expensive is not a good investment. The most expensive business on the table is Sunrun. Sunrun is the nation’s largest residential rooftop solar panel system seller/installer. Sunrun’s valuation might also shed Thumbnail valuation.
To start at the top of the income statement, Sunrun shares trade at 10.3x revenues. The most profitable company in the S&P 500, Microsoft, trades at 13x revenues. Sunrun operates at a loss. Obviously, not only is tremendous growth anticipated, but tremendous profitability, too.
Let’s simply accept that investors have correctly anticipated Sunrun’s future success and make that the starting point for a valuation exercise.
If, 10 years from now, Sunrun is ultimately valued at 25x net income, and if today’s $9.5 billion valuation is appropriate, that would require $380 million of net income ($9,500 million ÷ 25).
Let’s say Sunrun will have the same net profit margin as the average S&P 500 company, which is 10%. That means it would need $3,800 million of sales to generate that level of earnings ($380 mill ÷ 10%).
Since sales are now $920 million, they would have to rise by 4.1x in the next 10 years. That would require annual sales growth of 15.2%.
You see how neatly that all works: investors accept the company’s 10-year, 15% annual sales growth projections, and if a 10% net profit margin and a P/E of 25x earnings are reasonable, then the company will have a $9.5 billion market cap at that time. Except that is the current price. That means a 10-year return of zero.
In order to get a 10% annualized return from the stock, Sunrun would need to be priced at a P/E of 65x its earnings 10 years from now, if at a 10% net margin. Or it would have to have some combination of lower P/E and higher growth and/or higher profit margin.
In the meantime, this is Sunrun’s recent pattern of revenue growth and profitability (the company did recently increase its estimate of installed-capacity growth in 2021 from 20-25% to a new estimate of 25% to 30%).
For the time being, Sunrun loses an extraordinary amount of money, an amount that has been getting larger. Perhaps there are economies of scale that will manifest in the future,so that it will attain profitability. Perhaps from the roughly one-half of Sunrun’s revenues that are from long-term customer service agreements that run up to 25 years. For now, though, the company would seem to require a lot of external financing, and that is one of the greatest business risks.”
