1. Sunrun Inc. (NASDAQ:RUN)
Number of Hedge Fund Holders: 31
Sunrun Inc. (NASDAQ:RUN) is a California-based company that designs and sells residential solar energy systems in the United States. The company has over 600,000 customers and has sold its solar services in 22 states, including DC and Puerto Rico. The company reported a revenue of $435.23 million for Q4 2021, up 35.8% year-over-year, beating market consensus by $26.27 million.
Morgan Stanley analyst Stephen Byrd said on February 18 that Sunrun Inc. (NASDAQ:RUN)’s solar install growth exceeded expectations in Q4, but management called out omicron-related labor productivity and fulfillment costs, product mix, and rapid backlog growth as drivers for “the relatively disappointing quarter”. The COVID-related and product mix shift issues that impacted margins in Q4 are expected to reverse, driving higher margins over the course of 2022. The analyst kept an Overweight rating and a $91 price target on Sunrun Inc. (NASDAQ:RUN) shares.
In the fourth quarter of 2021, 31 hedge funds held long positions in Sunrun Inc. (NASDAQ:RUN), as compared to 37 funds in the prior quarter. Tiger Global Management is the biggest shareholder of the company, with more than 7 million shares worth $242.6 million.
Here is what Horizon Kinetics has 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%).
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