Over the past six months, Sunrun’s shares (currently trading at $15.52) have posted a disappointing 14.7% loss, well below the S&P 500’s 11% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Sunrun, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Sunrun Not Exciting?
Even though the stock has become cheaper, we don’t have much confidence in Sunrun. Here are three reasons you should be careful with RUN, plus one stock we’d rather own.
1. Operating Losses Sound the Alarm
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Sunrun’s high expenses have contributed to an average operating margin of negative 60.4% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
While Sunrun posted positive free cash flow this quarter, the broader story hasn’t been so clean. Sunrun’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 30.5%, meaning it lit $30.50 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Sunrun’s $14.85 billion of debt exceeds the $1.09 billion of cash on its balance sheet. Furthermore, its 20× net-debt-to-EBITDA ratio (based on its EBITDA of $690.5 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Sunrun could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Sunrun can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Sunrun isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 30.5× forward P/E (or $15.52 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Sunrun
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