The renewable energy industry is expected to see accelerating growth in the coming years, primarily due to government incentives and tax rebates to install solar panels and concerns for climate change. According to Allied Market Research, the global solar energy market is expected to reach $223.3 billion, growing at a CAGR of 20.5% over the next five years.
However, the renewable energy industry presently faces supply chain issues, which significantly increase the cost of solar panels. This cost increase is driven by skyrocketing shipping prices and increasing prices of solar panel components. As a result, Invesco Solar Portfolio ETF (TAN) has tumbled 18.6% year-to-date, underperforming the whole market. Consequently, long-term investors can scoop up shares of solar stocks at a solid discount.
Keeping that in mind, I’ll analyze and compare two solar stocks: SunRun Inc. (RUN) and ReneSola Ltd (SOL), to see which is a better investment.
Founded in 2007, RUN is a California-based solar energy company that engages in the development and selling of solar panels, leads, and racking to residential customers. Headquartered in Stamford, Connecticut, SOL offers solar power projects in the United States and Europe. It operates through three key segments: Solar Power Project Development, EPC Services, and Electricity Generation Revenue. Year-to-Date, shares of RUN have plunged 39%, while SOL stock has dropped 50%.
Recent Developments
On December 9th, JP Morgan analyst Mark Strouse downgraded SunPower to Underweight with a price target of $27 amid its premium valuations. Also, the JP Morgan analyst named SunRun as one of his top alternative energy stocks. He believes input prices to drop in 2022, supporting solar energy stocks. In addition, the "Build Back Better Act" is expected to bring benefits for the renewable energy industry as well.
On December 6th, ReneSola Power announced a $50 million American Depositary Shares buyback program, representing about 14% of its market cap. To date, the company has about 70 million ADS outstanding. Undoubtedly, this announcement was perceived as bullish, sending SOL stock 4.4% up during the pre-market session.
Recent Financial Performance
On November 4th, SunRun reported solid third-quarter data. The company reported revenue growth by 109.1% year-over-year to $438.76 million, beating Wall Street revenue estimates by $25.02 million. This strong growth was caused by higher solar energy systems sales from Vivint Solar and higher revenues from Customer Agreements. RUN’s GAAP EPS came in at $0.11, well above the consensus of $0.01.
In Q3, the company’s networked solar energy capacity was reported at 4,457 megawatts compared to 2,272 megawatts in a prior-year quarter.
The company’s EPS is expected to lift to $0.02 in the fourth quarter of 2021, exceeding its year-ago figure of ($0.75). Following the same trend, its revenue for the next quarter is projected to grow 28.60% YoY to $412.03 million.
On December 8th, ReneSola delivered lower-than-anticipated third-quarter results, which concerned investors, causing a 9% drop in SOL shares. In Q3, total revenue has risen 53.1% year-over-year to $15.57 million, driven by the sale of solar projects in the U.S. and Poland. However, SOL failed to beat analysts' estimates, missing $4.67 million in revenues. Also, the company reported Non-GAAP EPADS of $0.02, missing Wall Street expectations by $0.03.
The company’s gross profit has been reported 3.4% higher at $6.1 million. However, its gross profit margin stood significantly lower year-over-year at 39.2% compared to a gross profit margin of 60.6% in a year-ago quarter. SOL’s net income came in at just $0.7 million versus $2.1 million as of 3Q2020.
For the fourth quarter, analysts expect SOL's EPS to stand at $0.05 compared to $0.18 in the year-earlier period. However, its Q4 revenues should improve by 73.60% year-over-year to $29.19 million.
Comparing Valuations
In terms of Forward EV/Sales, RUN is currently trading at 10.14x, which is 267% higher than SOL, whose multiple is currently standing at 2.76x. However, both companies look overvalued compared to the sector's median of 2.04x.
When it comes to the TTM P/B multiple, RUN's P/S multiple of 1.41x is slightly higher than SOL's 0.94x.
Although SunRun looks relatively expensive, I think there’s no reason to worry as its multiples reflect a premium caused by the strong fundamentals.
Bullish Options Bets Placed On RUN
The options, which expire on December 17th, 2021, saw increased call buying on Monday. The open interest for the $45.00 calls rose by 5,594 contracts to a total of 7,946 open contracts (source: barchart.com). A buyer of those calls would need the stock to rise to $45.85 by the expiration date, a gain of about 8% from RUN Friday's closing price.
The Bottom Line
While SunRun and ReneSola should benefit from the solar energy industry’s growth, I believe SunRun is a better investment based on its superior financials, higher forward growth rates, and favorable options market sentiment.
RUN shares were unchanged in after-hours trading Monday. Year-to-date, RUN has declined -39.31%, versus a 26.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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