The stock of Sunrun (NAS:RUN, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $55.16 per share and the market cap of $11.2 billion, Sunrun stock appears to be significantly overvalued. GF Value for Sunrun is shown in the chart below.
Because Sunrun is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10.3% over the past three years and is estimated to grow 18.86% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Sunrun has a cash-to-debt ratio of 0.10, which is in the bottom 10% of the companies in Semiconductors industry. GuruFocus ranks the overall financial strength of Sunrun at 2 out of 10, which indicates that the financial strength of Sunrun is poor. This is the debt and cash of Sunrun over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Sunrun has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $922.2 million and loss of $0.94 a share. Its operating margin is -50.44%, which ranks in the bottom 10% of the companies in Semiconductors industry. Overall, the profitability of Sunrun is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Sunrun over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Sunrun is 10.3%, which ranks better than 69% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is -45.1%, which ranks in the bottom 10% of the companies in Semiconductors industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Sunrun’s ROIC was -5.89, while its WACC came in at 13.62. The historical ROIC vs WACC comparison of Sunrun is shown below:
In closing, the stock of Sunrun (NAS:RUN, 30-year Financials) is believed to be significantly overvalued. The company’s financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Semiconductors industry.