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Sunrun Leaving Investors More Questions Than Answers

By Travis Hoium - Sep 26, 2015 at 7:45AM

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Can Sunrun's higher-than-average cost structure survive in the bruising residential solar space?

Source: SunPower.

There haven't been a lot of positives for solar finance company Sunrun (NASDAQ: RUN) since hitting public markets. The stock's $14 IPO price was higher than the stock has ever traded on the open market. Adding insult to injury, a disappointing second-quarter earnings report left investors underwhelmed.

However, what should be most concerning for investors are the high costs and rosy assumptions built into Sunrun's business model. Residential solar installers are high risk today, but this one might be in an even worse positioned than competitors.  

Behind the 8-ball
A look at Sunrun's earnings report shows that the company is well behind competitors SolarCity (SCTY.DL) and Vivint Solar (VSLR) from a cost perspective. And it's not even close.

 

Sunrun 

SolarCity 

Vivint Solar 

Installation Cost

$3.07

$2.13

$2.12

Sales

$0.69

$0.53

$0.53

General & Administration, Other

$0.33

$0.24

$0.35

Total Cost Per Watt Installed

$4.08

$2.91

$3.00

Source: Company earnings presentations.

Logically, this makes some sense. In its legacy and non-direct business, Sunrun pays partners to generate leads and install projects, meaning they pay them a profit margin as well. So, higher installation costs aren't surprising. What's troubling is that overhead costs are still higher than competitors, which shouldn't be the case if you're using channel partners to do a lot of your work for you.

Management said on the conference call that the direct business is lower cost than channels and that by 2017 it expected to be competitive with competitors' costs, which are estimated to be around $2.50 per watt, but for a company that's been in the residential solar business as long as anyone Sunrun is way behind competitors, which isn't a good sign.

More value than competitors?
Taking the analysis to the next level, you can see that Sunrun says that it's creating more value per watt than SolarCity and Vivint Solar and it's keeping significantly more of each contracted payment from customers as retained value.

 

Sunrun

SolarCity

Vivint Solar

Nominal Contracts Remaining

$1.92 billion

$7.7 billion

$1.4 billion

Retained Value Forecast

$1.22 billion

$3.82 billion

$680 million

Retained Value as % of Contract

64%

50%

49%

Total Retained Value Per Watt

$2.39

$1.81

$2.00

Source: Company earnings releases.

The question is: How could a company with higher costs than competitors be keeping more of the contracted payments from customers as value for shareholders and be generating more value per installation? Logically, that makes no sense in a highly competitive solar market unless Sunrun is gouging customers. 

Sunrun's projections don't hold up to scrutiny
It looks like Sunrun is using even rosier assumptions than competitors in the solar industry and that should be troubling for investors. But even more concerning is that Sunrun's cost structure is over 30% higher than competitors.

As the industry grows, it's likely customers will begin buying more of their systems instead of leasing them. That means cost will become the differentiator for companies without a technology advantage (something Sunrun doesn't have). I'm not sure how long a company like that can survive without a vast reduction in costs, and until we see that this is a solar stock, I would stay far away from it.

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Stocks Mentioned

Sunrun Inc. Stock Quote
Sunrun Inc.
RUN
$21.07 (17.45%) $3.13
SolarCity Corporation Stock Quote
SolarCity Corporation
SCTY.DL
Vivint Solar, Inc. Stock Quote
Vivint Solar, Inc.
VSLR

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