Equity shares of solar energy specialist Sunrun (NASDAQ:RUN) — which provides photovoltaic (PV) systems and battery energy storage products mainly for residential customers — slipped 10% before slightly paring back the red ink. Unfortunately, the main culprit appears to center on an analyst price target downgrade. Moreover, the volatility of RUN stock underscores brewing skepticism about the solar energy industry.
Specifically, UBS analyst Jon Windham, while maintaining a “neutral” assessment of RUN stock, lowered the firm’s price target to $20. Prior to this rating, Sunrun shares featured 17 buy ratings, seven holds and zero sells, according to Investing.com. At the same time, the research platform pegged the fair value of SUN shares at $20.07. Still, this target carries a high degree of uncertainty.
The downgrade comes at a particularly sensitive time for Sunrun. Investment resource Gurufocus warns its readers that RUN stock suffers from seven red flags. A top concern for the underlying enterprise is the ongoing issuance of debt. Over the past three years, Sunrun issued $4.2 billion of debt.
Adding to concerns for investors in a tricky market cycle is Sunrun’s sustained operating losses. Per Gurufocus, the company has never been profitable in the past three years. Even worse, the company’s operating margin has been in a five-year decline. The average rate of decline clocks in at a worrying 7.9% per year.
RUN Stock Suffers From Sector-Wide Skepticism
In all fairness, RUN stock on paper enjoys a positive backdrop. From information provided by Grand View Research, the U.S. residential solar PV market size reached a valuation of $14.21 billion in 2022. Moreover, experts project that the sector will expand at a compound annual growth rate (CAGR) of 15.3% from 2023 to 2030.
Enticingly, at the culmination of the above forecast period, the industry should rake in revenue of $44.77 billion. Undergirding sentiment for RUN stock and its ilk is demand from high-powered state economies like California and Texas. Therefore, Sunrun seemingly benefits from rising interest.
Nevertheless, the other side of the coin stems from rising skepticism about the solar industry’s viability. Recall that in late April of this year, Enphase Energy (NASDAQ:ENPH) released a disappointing sales forecast, citing weak consumer demand. Further, The Wall Street Journal pointed out that the disclosure dragged down other solar-related investments.
Tellingly, the WSJ mentioned that higher borrowing costs negatively impact RUN stock and its peers. The news agency wrote that “[c]ustomers typically finance solar panels with loans of roughly 20 years, which are then pooled together and sold to investors. Higher rates are softening investor demand for the asset-backed securities.”
While evidence of disinflation exists, interest rates remain significantly elevated against pre-pandemic norms.
Why It Matters
According to TipRanks, over the past three months, Wall Street analysts peg RUN stock as a consensus moderate buy. This assessment breaks down as 11 buys, four holds and zero sells. Further, the average price target lands at $32.80, implying roughly 102% upside potential. However, among the five most recent ratings, holds outrank buys by three to two.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
