Is Sunworks the Penny Stock of Your Dreams?

There is no question that if you bought shares of Sunworks (NASDAQ:SUNW), a small California-based installer of solar power systems before Sep. 24 trading, right now you’re happier than a pig in you-know-what. SUNW stock jumped as much as 633% that day on rumors the company was getting into electric vehicles.

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Reminiscent of SPI Energy’s (NASDAQ:SPI) surge around the same time, the speculative nature of EV stocks has clearly gotten out of hand. 

I don’t know about you, but 2020, in addition to being the year of the novel coronavirus and work-at-home business solutions, it’s also become the year of the pivot. Companies are getting out of their core competencies to leverage the secular trends happening due to Covid-19.

Consider AgEagle Aerial Systems (NYSEAMERICAN:UAVS). It’s pivoting from agricultural-based drone equipment used for providing crop data for farmers to e-commerce focused drone-based deliveries. It hopes to conquer the last mile. 

Like SUNW, UAVS is a penny stock, which means it trades under $5. Like UAVs, there are pros and cons for betting on SUNW stock.

It’s not the penny stock of my dreams. However, it could be yours. Here’s why. 

Sunworks’ Core Business Merges

Over the past three years, revenues have dropped from $77.5 million in 2017 to $59.8 million in 2019. At the same time, it’s gone from an operating loss of $6.3 million in 2017 to an $8.3-million loss two years later.

The highlight of 2020 was its Aug. 10 announcement that it was merging with Peck Company Holdings (NASDAQ:PECK), one of the leading installers of solar power systems in the northeastern U.S. The transaction sees Peck acquire Sunworks for 3.1 million of its shares. As I write this, that’s worth $21.2 million. Sunworks’ shareholders will own 36.54% of the combined company. 

The combined businesses had $88 million in 2019 revenue, it has a backlog of $76.8 million, and significant cost synergies are available. More importantly, Peck had significant growth in 2019 – revenues grew 76% from $16 million in 2018 to $28.2 million in 2019 – while also generating $921,113 in operating profits. 

There are two benefits to the deal.

First, the combined entity is now a coast-to-coast installer of solar power systems. The second is that Sunworks had $21.6 million in net operating loss carry-forwards at the end of 2019. Those can be offset against future income.

Like Donald Trump, the Sunworks/Peck combination won’t be paying taxes for several years, which will allow it to continue scaling its business while also delivering for shareholders a pathway to profitability. 

On Oct. 7, Peck announced a $7.3 million contract to install a 5.3MW system in Rhode Island. The contract is for an existing long-time customer. On Oct. 13, Peck announced six new projects totaling 10.5MW in its home state of Vermont. The contracts are worth $7.6 million.

To date, Peck has installed more than one-third of the 358MW of solar power systems in the state. With approximately 251MW of solar power installations expected by 2025, Peck will likely get a big chunk of this business. 

Interestingly, in the Year of the SPAC, Peck became a public company in June 2019 through a combination with the Jensyn Acquisition Corp. Even after recently selling 1.4 million shares of stock in a secondary offering, Peck chief executive officer Jeffrey Peck owned 20% of the company

Assuming the combination with Sunworks goes through sometime in the fourth quarter, the CEO will own approximately 12% of the combined entity. 

The Bottom Line on SUNW stock

My InvestorPlace colleague, David Moadel, recently suggested that SUNW was worth buying because of its core business and not rumors it’s getting into the EV business. 

“This is a time for cautious optimism when it comes to SUNW stock. There’s no denying that Sunworks’ sales numbers are improving. That’s backed by verifiable data,” Moadel stated Oct. 21. 

“What’s not verifiable is the rumor that Sunworks will pivot to the electric vehicle market. I wouldn’t want to see anyone get burned (again, no pun intended) by speculating on this fascinating solar company.”

Moadel’s referring to some of the recent contracts Sunworks has gotten in the second half of 2020. 

Overall, however, Sunworks is in much better hands with Peck running the show. If you’re speculative by nature, SUNW, or should I say PECK, could be the penny stock of your dreams. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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