Sunrun Inc. (RUN, Financial) was founded in 2007 to bring solar energy directly to homes in the U.S., making clean energy more accessible to those without the option of commercial clean energy. The company makes solar available at little to no upfront cost, and as solar energy has gained widespread adoption, the technology has proven cheaper in the long run as well, helping to grow Sunrun’s business.
Over its 15-year history, Sunrun has grown into its own as the leading residential solar company in the U.S. with over 760,000 customers, offering solar service in 22 states, Washington D.C. and Puerto Rico. Yet, there is still a huge runway for growth. In this two-part series, we will take a deep dive into Sunrun’s product offerings, business model, financial structure, market opportunity, supply chain and headwinds to see whether it could offer a compelling long-term investment opportunity.
Product offerings
Sunrun makes the vast majority of its revenue from solar panel and battery systems, which it installs on residential rooftops.
The company’s solar panels are not top of the line – it would be difficult to scale up that way, since most customers would prefer their solar service to be cheaper than fossil fuels rather than more expensive. However, they are still among the best solar rooftop panels on the market.
The process of getting rooftop solar panels is not as simple as just buying them, as it involves getting the right permits beforehand and then making sure everything is in proper working order throughout the lifetime of the system. Thus, Sunrun’s service offerings are essential to the business. It helps customers through the process of getting all the right paperwork and permits completed for their local and state laws and checks for net metering programs to see if you are eligible to sell excess energy back to the grid.
When it comes to maintaining systems after their installation, Sunrun offers a 10-year comprehensive warranty to customers who lease their solar panels, covering everything from equipment replacement to labor, parts and repairs. Those who outright buy their systems, on the other hand, will get their warranty coverage through the manufacturer of the specific panels they purchase (manufacturer’s warranty), which can vary from around 12 to 25 years.
In addition to its solar panels, Sunrun also offers battery storage systems so that customers can store any excess energy generated for later use at night or during power outages. It has partnered with Tesla (TSLA, Financial) to offer Tesla Powerwall, a smart home battery, as part of its Brightbox solar battery storage service. The Tesla Powerwall not only has some of the best specifications on the market, it also offers smart monitoring and management, making it a great addition to Sunrun’s rooftop solar panels.
The newest addition to Sunrun’s product offerings is its at-home charging port for the Ford (F, Financial) F-150 Lightning. Ford Intelligent Backup Power ensures optimum placement and charging capabilities as well as syncing with the Home Integration System to go with the Ford Charge Station Pro. This system also allows the F-150 to power the home, serving as a backup battery in case of a power outage. The Ford partnership represents an important step in the evolution of Sunrun’s business model, and the company continues actively seeking similar partnerships with other EV makers.
Business model
Sunrun mainly operates on a subscription-based business model, and it plans to continue adding additional subscription offerings through partnerships and new product developments in order to increase cross-selling opportunities.
Its most popular offering among customers is the monthly subscription, which Sunrun designed to be more attractive to the majority of its customers so that it can maximize subscription-based revenue. The monthly subscription requires little to nothing in terms of the down payment, and customers then lease the panels on a month-to-month basis.
The subscription model is where Sunrun truly shines as it is regarded as the best low-upfront-cost offering that is available in most of its service areas. It faces more intense competition in its full system sales, as customers looking to buy a full system outright typically have enough wealth to go for a more premium system if they so choose.
The company could improve its competitive position for full systems in the long run with its goal to provide more interconnection such as vehicle-specific EV charging systems.
It is also working to improve the customer experience in getting residential solar in the first place, a demonstration of the company’s commitment to making solar more accessible. Sunrun is one of the founders of a coalition to develop an industry-wide permitting tool called SolarAPP+, which should streamline the process of getting residential solar permitting and interconnection.
We can glean some more insight onto how Sunrun’s business model might evolve in the future by examining its investment in Lunar Energy, which emerged from stealth in August 2022. Lunar was founded in 2020, and under the leadership of former Tesla Energy executive Kunal Giotra, it plans to turn “homeowners into active members of the energy economy by giving them the freedom to generate, store and control their own clean energy and share it with their communities,” according to Sunrun. Sunrun has a 37% ownership stake in Lunar as well as preferential access to the technology the startup is developing.
Lunar’s business mission meshes well with Sunrun’s marketing pitch that residential solar is the way to go in order to protect consumers from the outdated and faltering energy grid in the U.S. Worsening grid conditions could open more of an opportunity for companies to step in and provide alternative solutions.
Financial structure
While investors tend to associate subscription models with greater profitability thanks to the likes of Adobe (ADBE, Financial), Sunrun is still an asset-heavy business, which complicates matters. Its premier offering is a rooftop solar system with little to no down payment, which is a key step in getting new customers and achieving Sunrun’s long-term goals, but which does not lend itself to high margins.
Below is a GuruFocus breakdown of Sunrun’s 2021 income statement. As we can see, the company is not currently profitable. Its biggest expense is the cost of goods sold, followed by selling, general and administrative. The SG&A expenses are necessary for a company in growth mode, as it needs to focus on getting as many new customers as possible. The high cost of goods sold is a bit more worrying, taking up $1.4 billion of the company’s $1.6 billion in revenue for full fiscal 2021.
As Sunrun’s installed customer base grows, the COGS should eventually begin to come down as more subscription revenue (from customer agreements on the income statement) will continue coming in from long-term customers who only need the occasional maintenance for their systems rather than a full system installation. The tipping point toward profitability should be when subscription revenue is sufficient to make up for all of the new systems that the company is installing (as well as other expenses such as maintenance, repair, etc.).
The lack of profitability means Sunrun is dependent on continued issuance of debt, which has become more of a setback in the current rising interest rate environment. As of the fiscal quarter ended Sept. 30, 2022, the company had cash and cash equivalents of $672 million compared to short-term debt of $244 million and long-term debt of $8.1 billion, resulting in a cash-debt ratio of 0.08.
A portion of the company’s current debt is related to equity investments such as Lunar. I consider such investments to be part and parcel with the company itself, since Sunrun has decided to tie its future to them.
Sunrun also raises funds by issuing new shares, as shown by the three-year average share buyback ratio of -22.5%. The bulk of recent share issuance occurred in the fourth quarter of 2020, so such high levels of shareholder dilution may be reserved for periods of economic distress. There will always be a danger of shareholders being diluted when it comes to unprofitable companies.
Stay tuned
Now that we have gone over how Sunrun’s business works, the second part of this analysis will focus on how external factors affect the business, such as the overall market opportunity available, Sunrun’s supply chain structure and the headwinds the company faces or could encounter in the future. Stay tuned!
