Sunrun’s stock price has taken a beating over the past six months, shedding 50.7% of its value and falling to $6.83 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Sunrun, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Even though the stock has become cheaper, we don't have much confidence in Sunrun. Here are three reasons why RUN doesn't excite us and a stock we'd rather own.

Why Is Sunrun Not Exciting?

Helping homeowners use solar energy to power their homes, Sunrun (NASDAQ:RUN) provides residential solar electricity, specializing in panel installation and leasing services.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Sunrun’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 6.3% over the last two years. Sunrun isn’t alone in its struggles as the Renewable Energy industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sunrun’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Sunrun burned through $767.7 million of cash over the last year, and its $12.99 billion of debt exceeds the $947.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Sunrun’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Sunrun until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Sunrun isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 9.3× forward EV-to-EBITDA (or $6.83 per share). At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of Sunrun

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