Sunrun (NASDAQ:RUN) continues to be the only major residential solar installer with its foot on the growth pedal as its other major competitors tap the brakes. Tesla (NASDAQ:TSLA) has decided to shrink its solar business and has laid off thousands of former SolarCity workers. Vivint Solar (NYSE:VSLR) has also shrunk and is attempting to focus on more profitable markets.
Despite higher costs than its competitors', Sunrun continues to expand its business. And it could take decades to determine if the company is adding hundreds of millions in value as it says it is.
What Q2 2017 looked like
Sunrun's deployments rose 16% versus a year ago to 76 MW, and bookings rose 28% to 88 MW. Management said that NPV created during the quarter was $74 million (though I'll throw some holes in that below).
Overall, revenue was $137.8 million in the second quarter and net income was $25.1 million, or $0.23 per share. The profit was largely due to $90.4 million of losses allocated to non-controlling interests, or tax equity partners.
One notable decline was solar energy systems sales, which fell 6% to $72.5 million, while gross margin fell to 16% from 20.1% a year earlier. This is the company's biggest immediate cash generator and doesn't rely on long-term financing like the lease business does.
The constant problem with Sunrun
My constant critique of Sunrun is that management presents its contracted solar systems as if they'll generate revenue for 30 years, despite the fact that initial contracts are only 20 years long. In the second quarter, management said they created $1.10 per watt in NPV, but $0.58 of that value is assuming homeowners will renew the leases on the 20-year-old solar systems on their roofs. There's no history to indicate that will be the case, and the chances that 100% of people do this seems highly questionable given the rapidly improving technology and aesthetic of solar panels.
The other flaw in the model is a 6% discount rate for cash flows, which is unreasonably low.
So let's judge Sunrun's performance in the quarter by its own numbers. At the end of Q1 2017, management said the company had $1,916 million in gross earning assets and $846 million of debt or financing obligations, leaving $1,070 million in net earning assets. If we keep the 6% discount rate and pull out the $647 million of presumed value from a lease renewal, which assumes no customers renew leases on 20 year old equipment, value falls to $423 million.
Looking at the same numbers in Q2 2017, there were $1,894 million in gross earning assets and $805 million in financing, leaving $1,089 million in earning assets. But pull out the renewal value and there's $424 million in value, just $1 million more than a quarter ago.
I would argue that Sunrun generated little to no value in the quarter, and that's assuming contracted systems perform as planned over the next 20 years.
Where Sunrun is in the right position
What investors should like about Sunrun's plan is its focus on energy storage. It's calling it "Brilliant Home + Grid Services" but really it's just solar plus storage with Sunrun generating value for energy and services used by the grid. This could generate more value than solar alone, with management estimating that grid services alone could add $2,000 in NPV per installation, according the management's estimate.
As much trouble as the leasing model is in within solar today, it makes a lot of sense for energy storage. And Sunrun will be well positioned as solar plus storage business models battle it out in coming years.