When president-elect Joe Biden takes his oath of office, there will be a lot on his plate. He has to contend with a pandemic, a recovering economy, and massive unemployment. But those are things that he will inherit from his predecessor. On the other hand, what he will bring to the White House is a comprehensive set of green initiatives that can dramatically change our energy mix in favor of renewables. In this environment, California-based Sunrun (NASDAQ:RUN) stock is making significant strides after the novel coronavirus pandemic did a number on its market cap back in March.
RUN stock is up 27.6% in the last three months, but shares are still at an approximately 29% discount to their 52-week high of $82.42 per share. So there is definitely some upside to exploit here. But there is a bear thesis that is emerging, which has to do with the elephant in the room, Tesla (NASDAQ:TSLA).
Elon Musk believes the company’s solar and energy storage business will grow faster than its electric vehicle business. That may seem far-fetched. But then again, several analysts said the same thing about the company’s EV business.
RUN Stock Will Benefit From an Increasingly Solar Future
Solar is now the cheapest and fastest-growing source of energy for generating electricity. And that doesn’t even account for subsidies. Renewables are here to stay, and with the White House and Congress under full Democratic control, we could be headed for decarbonization sooner than ever.
Fatih Birol, executive director of the International Energy Agency, believes US solar and wind capacity can more than double in five years if Biden sticks to campaign promises.
“This would have major implications for the decarbonization of the US energy system as well as global implications for the growth of renewable energies and release of global CO2 emissions,” Mr. Birol said.
By the end of last year, the US had 180 gigawatts of wind and solar capacity; it’s forecasted to rise to 380GW by 2025 if the Biden administration goes ahead with its proposals.
And let’s take the White House out of the equation. Even under President Trump, renewable energy accounted for about 18% of large-scale electricity generation last year. So, this is a secular trend we are talking about. After its all-stock merger with Vivint Solar, Sunrun now has a 17% share of the US solar installation market, with SolarCity/Tesla coming in next at 5% through the end of 2019.
The Tesla Situation
Recent chatter surrounding Sunrun has focused on how it will fare against Tesla increasing its solar power presence. The company’s renewed focus on its solar business will have far-reaching implications for the sector. Sunrun and Vivint Solar have historically dominated the space, but Tesla wants to change the equation through game-changing storage.
Considering the role energy storage plays in the long term growth of rooftop solar, Tesla’s battery innovation could pry away a large chunk of the home energy business. In the third quarter, Tesla deployed 759 MWh of storage, representing 59% growth year on year. In terms of solar capacity, Tesla deployed 57 MW of solar in Q3, a 33% year on year increase, but still doesn’t compare favorably with Sunrun — Q2 solar deployments came in at 78 MW.
Still, you can make the case that it’s just a matter of time. With the kind of resources Tesla has at its disposal, the company can pretty much do what it wants at this stage. It doesn’t need to market itself, its research & development wing is top-notch, and it can handily outspend Sunrun. And while all those arguments are fine, I believe that certain concerns are far fetched.
Elon Musk has interests in several areas. Everything from artificial intelligence to space exploration. However, the company’s main business concern remains the EV sector. The current year is a good one for the company. Tesla is on track to deliver on all the hype with record deliveries. But if it looks like things are going awry at any point, it will pull back from other business areas and concentrate on its bread and butter, a luxury Sunrun doesn’t have.
Financials Are Recovering From the Pandemic
A typical PV system lasts for a 25-year period. It requires maintenance, with battery packs expected to be replaced at least a couple of times. That gives solar companies a smooth recurring cash flow. Sunrun gives clients the option of buying the company’s solar equipment outright and services as needed. However, most customers lease the products and services from the company.
Granted, things have taken a hit due to the pandemic; 78 megawatts is a steep drop from 2,085 megawatts sequentially. But then again, the pandemic is an unprecedented event. Through the end of Q2, the company had already inked ten grid services contracts worth about $50 million over their lifespan. Not too shabby.
Plus, with us getting closer to the end of this crisis, pent-up demand for installations will positively impact its balance sheets in early 2021. Expect the markets to reward the company handsomely thereafter. Before all that, it would be wise to load up on RUN stock.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.