Sunworks: Overpriced On Any Metric, No Windfall In Sight – Seeking Alpha

Sunworks (SUNW) just raised $20M by selling 3.8M shares. Ordinarily I would not be a fan of fund-raising by dilution, but in this case SUNW is so overpriced that I have to make an exception. Let me cut to the chase: this company cannot seem to make money in its chosen line of business, contrary to rumor there is no reason to think it is going to pivot to another line of business, and I believe the shares are worth pennies.

Sunworks doesn’t make any money, and it isn’t growing

Sunworks has been in the solar business since 2014. The last year it turned a profit on an annual basis was 2015. On a quarterly basis, it has only had two profitable quarters in the interim. Nor is SUNW one of those revenue-before-profit growth stories; revenue has shrunk from a high of $86M in 2016 down to $47M in the TTM. The fact that 2016-19 were shrinkage and loss years, in spite of hosting the strongest economy in decades, is sufficient proof that the company simply doesn’t have a viable business model. In those same years, other solar companies were making money or at least growing their business.

COVID has made 2020 a bad year for SUNW, as for many companies. But it’s not uniquely bad. SUNW loses money in all kinds of environments.

No, the Biden administration isn’t going to fix things

The stated goal of the Biden administration is carbon neutrality by 2050, and part of the plan for that is a “modern infrastructure.” One can assume that the Biden administration will emphasize solar energy and other renewables. However, the natural place to push is not rooftop or commercial solar installations, which is SUNW’s strength. For making an entire country carbon-neutral in the most efficient way possible, the natural emphasis, rather, would be utility-scale renewable energy, which is not SUNW’s strength.

Don’t get me wrong—a significant Biden administration push for renewable energy would probably have a beneficial effect on SUNW’s bottom line. But it would not be the ultimate bailout that some investors seem to be hoping for.

No, Sunworks is not doing electric vehicles

SUNW’s stock price took a giant leap on Sept 24, which is odd because the only news around then was that NASDAQ notified the company that it failed to meet continued listing requirements. On Sept 22, when it got the NASDAQ letter, shares were trading at 0.77. Two days later they went as high as $6, and have mostly traded in the $3-4 range since then. The story behind this jump seems absurd.

(Source: Yahoo Finance)

There’s a different company, SPI Energy (SPI) that does solar installations, like Sunworks. They also have a sideline in crypto mining. On Sept 23, they announced another sideline, a subsidiary that would develop electric vehicles. EVs are a sexy story (like solar, like crypto … are you seeing a pattern?) especially as Tesla (TSLA) was soaring at this time. SPI promptly shot up from the $1 region as high as $46.

Somehow, traders concluded that SUNW might pull the same trick and start an EV subsidiary. SUNW has made no such announcement, they have no EV expertise, and there is every reason to think this speculation is ridiculous. Nevertheless, there you have it.

For no good reason that I can see, the stock has stayed elevated. This minor miracle is what has allowed the company to avoid delisting from the NASDAQ. Announcements since that time have included some modest contracts, a failed merger attempt, and the stock sale I began this article with, which allows SUNW to shore up its balance sheet to a degree.

Valuation

Sunworks does not make money right now, has not for several years, and it is shrinking not growing. Let me start, then, by valuing it against its balance sheet.

As of Q3, SUNW had a slightly negative TBV, and they are set to lose another million or two in Q4. But they just got a $20M cash infusion, leaving them with about $18M TBV. Distributed across 20.4M shares that is about $0.88 fair value. The stock traded at about $4 Monday.

Suppose, though, for argument’s sake, that some extremely positive Biden administration initiative promised a great 2021 for SUNW. At a very generous forward P/E of 40x, SUNW would have to make 0.10/sh in 2021, or ~$2M as a company. Is that doable?

In 2015, which was peak SUNW, they made $1.1M on $53M of revenue. For the TTM they lost almost $10M on $43M in revenue. Revenue is in the same ballpark, and operating expenses are approximately the same ($14.9M vs $14.2M) but the difference is in gross margins, which have compressed from 32% in 2015 to 10% today.

At 10% gross margins and $15M (we’ll be optimistic) of operating expenses, Sunworks would need $170M of revenue to generate $2M of profit. In other words, a razor-thin profit margin even with a quadrupling of revenue and friendly assumptions about expenses.

Now, I cannot guarantee that the Biden administration won’t come up with a plan that will quadruple Sunworks’ revenue. There is no specific plan on the table; there would be the hurdle of getting it through Congress; there would still be plenty of competition in what is, at the end of the day, a no-moat business. Optimists are working from general climate concern sentiments from the incoming administration, and nothing else. I remain a pessimist.

Conclusion

SUNW is wildly overpriced, on any basis. Stay away, or if you can get the borrow, go short. A decisive break above resistance at $7 would mean my thesis is wrong. On the other hand, a decisive break below $3 would indicate to me that the stock has further to fall. Depending on your risk tolerance, you could wait to get closer to $7 or below $3 before placing your bet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: https://seekingalpha.com/article/4394762-sunworks-overpriced-on-metric-no-windfall-in-sight

December 19, 2020 susan ward