What happened
Shares of home solar system provider Sunrun (RUN +5.87%) have been negatively impacted by two related headwinds so far in 2021, and the stock hasn't recovered. Through June 30, Sunrun shares were down 19.6% for the year, according to data provided by S&P Global Market Intelligence. Other solar stocks have bounced back, but investors potentially see an added risk with Sunrun.
So what
As the calendar turned to 2021, investors turned their attention to how the economic recovery would manifest, and what role inflation might play. The market reacted with a rotation away from high-growth stocks, which had been soaring, and into cyclical stocks as a way to play an expected increase in inflation. Sunrun was on the wrong side of that change, and the stock hasn't bounced back from the decline.
Image source: Getty Images.
Now what
The solar sector is still thriving and looks poised to continue to grow. As a group, renewables were the only energy source to see an increase in demand in 2020 as the pandemic stymied mobility and created uncertainty, according to a report by the International Energy Agency. The global agency also estimates that solar capacity development will continue to increase, reaching a level 50% higher than pre-pandemic levels by next year.
But that growth hasn't given investors renewed confidence in Sunrun. The prospect of inflation is particularly concerning, since the company finances much of its solar projects. Interest rate increases could be a long-term hit for the company's results.
Sunrun executive chairman Edward Fenster addressed this concern on the company's first-quarter 2021 conference call with investors, saying that the company doesn't expect "materially higher" rates in the near term. He also pointed out, "Sunrun delivered excellent customer values and cash flow results in recent periods, but base rates were at least twice what they are now."
Aside from interest rate concerns, Sunrun continues to grow its business. In July 2020 Surun acquired rival Vivint Solar for $3.2 billion, including debt, in an all-stock deal. The combined companies had about 500,000 customers at the time. As of March 31, that number had grown to 573,000, and management now says it expects its customer growth rate to be 25% to 30% for 2021.
The business itself has tailwinds, and company-specific growth remains strong. But the prospect of rising interest rates is a concern. For investors, the details of those future interest rates along with the company's financing specifics are where future research should focus.
