April’s oil price rout, horrendous as it was, created some interesting possibilities in alternative energy. Sunrun (NASDAQ:RUN), which is America’s No. 1 solar installer, seemed to thrive during the oil patch’s most challenging times. And RUN stock owners shook off the oil market debacle like it was no big deal.
This isn’t to suggest that RUN shareholders have had a smooth ride all year long. The onset of the novel coronavirus certainly took its toll on Sunrun and its investors. After all, not everyone can afford to upgrade their solar energy systems when there’s a pandemic going on.
Yet, Sunrun appears to be surviving and even thriving amid the coronavirus crisis. Indeed, they’re even getting involved in a deal that could prove to be transformative to the American solar market.
A Closer Look at RUN Stock
Let me start off with the 800-pound elephant in the room: RUN stock is not cheap. I’m not referring to the share price, which is in the low $40s. Most traders can probably afford to buy shares at that price.
Rather, I’m referring to the valuation of RUN stock, which has a jaw-dropping trailing 12-month price-earnings ratio of 465. Even in a bubbly market, this seems a bit excessive.
As for the price action of the stock, the RUN run-up has been breathtaking. The 52-week range of $7.84 to $48.30 should paint a clear picture of a stock that tanked hard during the coronavirus crisis but then proceeded to go parabolic.
Therefore, this stock should appeal more to momentum-focused traders than purely values-based investors. That being said, all open-minded investors might find value in RUN stock as a recent development could position Sunrun for robust revenue generation going forward.
A Major Merger
So, what caused RUN stock to go vertical? Much of it had to do with the announcement that Sunrun agreed to acquire Vivint Solar (NYSE:VSLR).
This is a massive acquisition with an estimated enterprise value of $3.2 billion. It’s a combining of America’s No. 1 and No. 2 solar installers. Upon striking the deal, Sunrun co-founder and CEO Lynn Jurich expounded on the ambitious objectives of this game-changing business combination:
“This transaction will increase our scale and grow our energy services network to help replace centralized, polluting power plants and accelerate the transition to a 100% clean energy future.”
That’s an exciting prospect, and RUN shareholders can expect to participate in what’s effectively a legalized monopoly in the solar-installation market.
I searched far and wide for any hint that regulators might try to block this merger, and I found not a trace of resistance at the governmental level.
Few Alternatives in Alternative Energy
Thus, it’s reasonable to conclude that the merger will probably go through without a hitch. Suffice it to say that if you see a lucrative future for the residential solar-equipment market, this will be the go-to investment.
As Sunrun and Vivint have pointed out, only 3% of homes in the U.S. currently have solar power. So, the market is nowhere near the saturation point. There’s plenty of room for growth in the industry, and that should be comforting to value-oriented investors if they’re concerned that RUN shares are overpriced.
KeyBanc Capital Markets analyst Sophie Karp might concur with this thesis as she recently assigned an “overweight” rating to RUN stock. With that, Karp made an excellent point: “Sunrun would represent one of the few investable clean energy names that is in demand with multiple classes of investors.”
In other words, post-merger, Sunrun will be among a relatively small handful of names available to alternative-energy investors. There are other companies in this category, of course, but Sunrun will be one that traders can’t easily ignore.
The Bottom Line
Admittedly, value-focused investors might take issue with RUN stock’s lofty P/E ratio. That’s understandable, but the merger that’s under way makes Sunrun a compelling name for open-minded clean-energy aficionados.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
