Sunrun Earnings: Growth Remains on Track Amid Share Selloff

We maintain our $27 per share fair value estimate for no-moat Sunrun RUN following its first-quarter results. We are puzzled by the sharp selloff in shares (down 15% at the time of writing) given the company’s results were in line with our expectations. We view shares as undervalued.

Sunrun reiterated its full-year guidance to increase installed solar capacity by 10%-15%, which we view as above market. Similar to peer SunPower, Sunrun was aggressive in the first quarter in signing up customers in California prior to regulatory changes (NEM 3.0). The company’s California sales increased 80% year on year in the quarter, resulting in a backlog of 150 megawatts. While this will support the company’s growth in the near term, it will likely become a headwind once the backlog is worked off as we estimate California solar installations to fall by half in 2024 relative to 2022.

Following years of growing preference for solar loans, Sunrun should benefit from a shift back to solar leasing moving forward. The company is the market leader in leasing financing, with approximately 60% market share. Leases are expected to gain overall share due to higher interest rates having an outsize impact on loans, and leases are eligible for certain tax-credit adders under the Inflation Reduction Act.

The overall financing environment remains in focus for Sunrun. The company estimates its current cost of capital at 7.0%-7.5% and we continue to use a 7% discount rate in our valuation. While we view shares as undervalued, we expect them to remain volatile given uncertainty in the residential solar and the overall financing environment.