Sunworks Stock Is a High-Risk, High-Reward Play on the Solar Boom


Solar stocks have been all the rage on Wall Street in 2020, with the Invesco Solar ETF (NYSEARCA:TAN) rallying 130% year-to-date to its highest levels since 2011. In this raging bull market, few solar stocks have shined as bright as relatively obscure Sunworks (NASDAQ:SUNW), as Sunworks stock has soared 130% in the past three months alone.

Of course, such huge rallies beg two enormous questions:

  1. Is the solar stocks breakout in 2020 the real deal?
  2. If yes, is SUNW stock a good way to play the solar energy megatrend?

In short, yes, solar energy is on the cusp of taking over the world’s energy production, and as a result, the 2020 breakout in solar stocks is simply the beginning of a much bigger, much longer uptrend in these stocks over the next 10-plus years.

And, yes, SUNW stock does offer a compelling high-risk, high-reward play on the solar energy megatrend, mostly because the stock sits at the intersection of high-quality, misunderstood and undervalued.

Net net, I’m speculatively bullish on the prospects of the big breakout in SUNW stock over the past three months, persisting over the next three years — a stretch in which Sunworks stock could rise more than 7X.

Here’s a deeper look.

Solar Is the Future

The year-to-date surge in solar stocks is not a head-fake.

The stars have finally aligned for the solar energy megatrend to come to life. That is, in 2020, four major legislative, consumer and economic megatrends have converged to promote rapid and widespread uptake of solar energy solutions, including:

  • Government support (almost every country in the world has a “100% clean energy” target for 2030, 2040, or 2050)
  • Falling costs (solar energy costs have dropped 70% over the past 10 years, and solar is now the cheapest electricity source in history)
  • Improving technology (26% of solar systems will be paired with energy storage capability by 2025, versus just 4% in 2019)
  • Rising consumer demand (46% of U.S. homeowners are seriously thinking about adding solar panels to their homes, up from 40% in 2016)

Over the next decade, these four megatrends will continue to converge, ultimately resulting in solar power becoming globally ubiquitous, with solar powering everything from your home to your office to your electric car. Solar energy will be at the root of everything we do.

Of course, that means there is huge upside in the solar industry over the next 10+ years. In 2019, solar energy production accounted for just 6.8% of U.S. electricity generation. As that share moves to 10%, 20%, and 30%-plus over the next one to two decades, the entire solar energy industry will grow by several hundred percent.

Solar stocks will keep surging. This rising tide will lift all boats, including SUNW stock.

Sunworks Stock Has Struggled

Sunworks is basically a small, $45 million construction company in California that has decided to specialize in residential and commercial solar panel installation, with a focus on mid-scale commercial projects.

At first glance, this company needs a lot of work. Despite strong solar demand in the U.S. over the past few years, sales at the company have been steadily dropping ever since 2016, while profit margins have eroded, losses have piled up, and the balance sheet has dwindled.

To be frank, Sunworks has been an eyesore in an otherwise burgeoning industry.

That’s why SUNW stock dropped from $25 in early 2016, to just 29 cents earlier this year.

The Company Is in Rebound Mode

But, four big things have changed over the past year, and when tied together, these four changes paint a clear picture of a solar panel installer in the first inning of a big rebound.

One, solar costs have dropped below traditional electricity costs for the first time ever, creating clear and robust economic incentives for consumers and businesses to install solar panels and become energy independent. These economic incentives lay the groundwork for enormous growth in new solar energy installation capacity, which had mostly flatlined. Indeed, U.S. new solar energy installation capacity is expected to rise 37% in 2020, versus a 12% drop from 2016 to 2019.

The emergence of compelling economic incentives ensures that 2020’s 35%-plus growth rate turns into the new norm for several years.

Two, California — where Sunworks does most of its business — has mandated that all new residential construction built post-2020 be constructed with solar panels, thereby essentially guaranteeing that Sunworks’ core market sees robust growth between now and 2025.

Three, Sunworks has started to win a lot of new business coming out of the Covid-19 pandemic. In the third quarter of 2020, Sunworks signed $10 million in new commercial and agriculture projects — a big number for a $45 million company — with 19 existing and new customers. Of importance, $3.6 million of those contracts were booked in the last week of September, and the company signed two more large projects in the first week of October, implying that the company’s new business momentum is only accelerating.

Fourth, Sunworks got an all-stock acquisition offer from The Peck Company (NASDAQ:PECK), a solar installer that is basically Sunworks’ twin in the Northeast. That’s big because industry consolidation almost always produces more favorable economics, by reducing the number of competitors in the market and removing overlapping jobs. So, a Sunworks-Peck combined company would generate enormous cost-saving synergies and operate at significantly higher profit margins than a standalone Sunworks company, implying more value in the long run.

Big picture: it looks like Sunworks — powered by booming solar demand, a revitalized California market, new deals and a potential acquisition — is on the cusp of a huge turnaround. If this turnaround persists, SUNW stock has big upside potential.

Compelling Upside Potential for Sunworks Stock

The math for SUNW stock to soar over the next few years isn’t that hard to follow.

The U.S. energy market has been adding roughly 10,000 MWdc of solar energy install capacity per year over the past few years. Against that backdrop, Sunworks has been doing about $60 million in annual revenue.

Current estimates call for 2020 install capacity to rise to nearly 20,000 MWdc. There are enough macro drivers in-place here to sustain 20,000 MWdc solar energy install capacity per year throughout the 2020s. That’s double the historical rate. Assuming Sunworks holds its own in this burgeoning market, then the company’s revenues could also double, to around $120 million per year.

Gross margins hover around 25%. Assuming the opex dollar base stays relatively flat around $15 million, then the company could be looking at $15 million in profits within the next few years. Based on a 20X earnings multiple, that implies a potential future valuation for Sunworks of $300 million.

And that’s without the acquisition, which would inevitably boost profit margins and the company’s potential long-term valuation.

Needless to say, then, SUNW stock appears to have significant long-term upside potential.

Bottom Line on Sunworks Stock

SUNW stock is a speculative high-risk, high-reward play on the solar energy megatrend. If you’re looking for something more stable and less risky, consider one of the larger solar stocks in the market. But, if you’re a risk-seeking investor with an appetite for big returns, then SUNW stock is an attractive pick in the booming solar industry.

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

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