The Law of Diminishing Returns Makes Sunrun Stock Look a Lot Riskier – Investorplace.com

Stock picking is an inexact science. This is particularly true of renewable energy stocks like Sunrun (NYSE:RUN). Solar is becoming a hot topic and analysts are paying attention. In the last 180 days, the number of analysts that are rating Sunrun stock has climbed from 8 to 13.

The Sunrun (RUN) logo is displayed on a smartphone screen in front of an American flag.

Source: IgorGolovniov / Shutterstock.com

As of this writing, Sunrun stock is up over 290% since May 8.

But as the number of analysts increase, the number of buy ratings has remained the same. The consensus rating for the stock is still a buy, but one analyst has taken the uncommon step of giving Sunrun stock a sell rating.

The consensus 12-month price target suggests the stock has about 10% growth coming from current levels. And while that is not shabby, it means Sunrun may not be as strong a buy as some believe.

The Market for Solar Is Growing

The nation’s leading provider of residential solar panels finalized a $9.2 billion deal to acquire Vivint Solar. This essentially makes Sunrun a duopoly with a much smaller Tesla (NASDAQ:TSLA) for the residential solar market. And that market should grow significantly in the next few years.

The story of solar is about more than the outcome of the presidential election. In many areas of the country, there is an urgency to adopt solar technology. California is one example, but there are other areas of the country that are seeing enormous stress being place on their power grid. And as this summer illustrated, demand did not wane as businesses remain closed. It just shifted.

Second, it does appear that Joe Biden will be the next president of the United States. Biden’s tax plan will expand existing renewable tax credits. And it also calls for the restoration of the federal Energy Investment Tax Credit (ITC).

And third, in case you hadn’t noticed, electric vehicle (EV) stocks have been on fire this year. The expected increase in demand for electric vehicles may benefit Sunrun for a few reasons.

On their latest conference call, Lynn Jurich, Sunrun’s co-founder and CEO forecast that EV demand will mean more demand for electricity and therefore create an urgency for larger (more profitable) systems. She went on to say that Sunrun may have a role to play in a home’s charging infrastructure.

Does Solar Need the Tax Credit?

One reason there is so much optimism for solar is that according to one analyst, Michael Weinstein of Credit Suisse, extending the tax credits is anticipated. And, there’s little doubt that such a credit would continue to accelerate the sector’s growth and make it competitive.

The solar tax credit, which was initiated under the Bush administration in 2006 began to be stepped down in 2020. The credit will go to zero (for residential solar) by 2022 without congressional action. However the anticipation of that extension also means that, according to Weinstein, the Sunrun stock price already takes that into account.

There is some belief that renewable energy prices have come down to the point where solar companies no longer need the tax credits to compete with fossil fuels. This was reinforced by Jurich who said while the tax credits help create jobs.

“If it doesn’t get extended, we would proceed along. The market’s not going anywhere,” she said.

A Double-Edged Sword for Sunrun Stock

That’s the good news. Now the bad news. Thomas Yeung wrote an article that captured my attention. In the article, Yeung emphasizes that the company’s business model is largely predicated on leasing its solar equipment.

But while this good for consumers who don’t have to come up with the upfront cost of installing solar (and they still get the tax credit), it’s not so good for Sunrun who becomes a financing company that is leasing solar panels at a loss. In fact, in this arrangement, Sunrun functions, in a sense, like a utility, that “charges” customers for its solar power.

So the tax credit will fuel demand. But with an uncertain outlook for organic growth in the economy (i.e. not fueled by stimulus), consumers will likely choose the financing option. And that means that Sunrun’s bottom line may not be as strong as investors would like.

The long-term narrative on solar is looking very good. And that bodes well for Sunrun. But with much of its growth already baked into Sunrun stock, now might be a time to follow the analysts and proceed with caution.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.

Source: https://investorplace.com/2020/11/sunrun-stock-may-have-priced-in-growth/

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