With the acquisition of Vivint Solar, Sunrun (NASDAQ:RUN) stock is now the unquestioned king of the U.S. solar market.
Is it good to be the king?
Sunrun opens for trade at about $65 per share. Thatâ€™s a market cap of $12.8 billion, with 20% of what is otherwise a highly fragmented market. The two companies had combined revenue of about $2 billion last year.
The two companies were complementary. Sunrun focused on direct sales to the corporate market and combining panels with batteries. Vivint focused on homeowners with power purchase agreements, as well as loans and cash sales.Â
The last time I wrote about Sunrun, I said that it should expect a Biden bump. Â Instead, it has gotten a Trump thump.
Let me explain.
Solar shares are being crushed after a weekend announcement on tariffs. The administration is making two-sided â€śbifacialâ€ť panels subject to the tariff and increasing it from 15% to 18%. Â While the move was supposedly made to increase U.S. production, that ship sailed when SunPower (NASDAQ:SPWR) spun off its production with a Chinese company last year.
Faced with stiff cost competition, all U.S.-based solar panel producers have been moving offshore. Some argue that Tesla (NASDAQ:TSLA) is an exception, but its Buffalo plant is assembling solar tiles from Chinese parts.Â
The tariffs sent Sunrun sales down almost 11% in Oct. 12 trading. It still trades on momentum rather than fundamentals. It expects a tiny profit of 2 cents per share on sales of $202 million when it next reports Nov. 5. Before the merger, Sunrun reported a loss of 11 cents per share for the June quarter, on revenue of $181 million.
Like Trump, Biden also says he wants to restart panel production in the U.S. But heâ€™s offering carrots, not sticks, as part of a $2 trillion clean energy and infrastructure proposal announced in July. The government currently spends about $100 billion on clean energy, mostly on expiring tax breaks. Biden would renew the tax breaks and do much more besides.
Oliver Garret of RiskEdge wrote in August that solar stocks would â€śgo ballisticâ€ť if Biden won, as he is now on track to do. The Invesco Solar ETF (NYSEARCA:TAN), which invests in solar stocks, has already tripled in value during the Trump years.
A lot of the Biden money would go to wind or transmission, however, as well as batteries. It wonâ€™t all go into panels. A lot of meat should go onto the Biden bones before making it an investment thesis.
What Sunrun is emphasizing in the Vivint deal is its scale. The company can now partner directly with utilities such as Duke Energy (NYSE:DUK) on residential solar. It has also closed a deal with Chanel, the luxury goods maker, to increase solar power in low-income areas and train low-income people for jobs as installers.
Analysts have been pounding the table all year for Sunrun stock, which at its height was up 400% for the year. Even with recent profit-taking, the shares are up 360% in 2020. Analysts trumpet $90 million in â€śsynergiesâ€ť and a rise of $8,000 in the net present value per customer. Solar deals promoted through utilities, like the one with Duke Energy, add to the excitement.
My problem with RUN stock is the same as the one with Sunpower.
Thereâ€™s a new generation of product coming over the next few years, thin-film products built with things like plastic and perovskite. These are going to upend the current solar business model. The next generation of cells will be bought as consumer products.
Itâ€™s the same thing that happened when PCs came of age in the 1980s. Margins will be crushed, dedicated sales staffs will become obsolete, and mass adoption will follow. The utility market may remain for a time, but the residential market as weâ€™ve known it is going away.
Thatâ€™s my story and Iâ€™m sticking to it. Change is coming to this market even faster than Biden realizes.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget Oâ€™Flynn and the Bear,Â available at the Amazon Kindle store. Write him atÂ email@example.comÂ or follow him on Twitter at @danablankenhorn.Â