Overvalued Residential Solar Will Experience Diminishing Demand And Minor Upside

Key Takeaways

• Rising interest rates, incentive reductions, and increased competition threaten Sunrun's revenue growth, demand, and ability to monetize residential solar systems.
  
• Margin pressure will intensify due to higher financing costs, diminishing pricing power, and economic risks, undermining earnings stability and cash flow predictability.
  
• Strong cost control, expanding high-margin battery services, strategic tax planning, and leadership in grid solutions position Sunrun for resilient growth and sustained profitability.

Catalysts

Designs, develops, installs, sells, owns, and maintains residential solar energy systems in the United States.

• Sunrun faces heightened long-term risk from increasing interest rates and tighter credit markets, which will make it harder for both consumers to finance residential solar systems and for Sunrun to efficiently monetize receivables; this will place chronic pressure on both top-line revenue growth and net margin as financing costs increase.
  
• The company is highly exposed to an unfavorable shift in federal and state incentive structures: the expiration of the 25D tax credit in 2025 and the step-down of the solar portion of the 48E investment tax credit starting in 2028, which, despite the management's safe-harboring activity, will likely result in sharp declines in market demand and contracted revenues beginning in 2026.
  
• The proliferation of lower-cost, utility-scale renewables and rapidly improving grid-scale storage solutions threaten to outcompete residential solar economically, eroding Sunrun's value proposition; this could lead to a permanently shrinking addressable market and falling revenue growth prospects over the coming decade.
  
• Sunrun's business model, reliant on third-party financing and long-tail contracted cash flows, remains vulnerable to elevated default risk, especially as macroeconomic uncertainties persist and as competitive pressures continue to squeeze margins, jeopardizing both earnings stability and cash flow predictability.
  
• With falling net metering benefits, rising grid interconnection fees, and the growing commoditization of solar hardware, Sunrun will find it increasingly difficult to sustain pricing power or offset declines in incentives and demand, resulting in ongoing margin compression and potential declines in total earnings power.

Sunrun Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sunrun compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sunrun's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Sunrun will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Sunrun's profit margin will increase from -120.6% to the average US Electrical industry of 10.2% in 3 years.
• If Sunrun's profit margin were to converge on the industry average, you could expect earnings to reach $213.4 million (and earnings per share of $0.84) by about August 2028, up from $-2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from -1.1x today. This future PE is lower than the current PE for the US Electrical industry at 30.6x.
• Analysts expect the number of shares outstanding to grow by 3.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Sunrun Future Earnings Per Share Growth

Risks

• The company's strong execution in cost reduction, margin expansion, and consistently positive cash generation implies improved operating leverage and financial flexibility, which can support stable or increasing net margins and earnings in the coming years.
  
• Rapid growth in battery storage attachment rates and participation in grid services is generating recurring, higher-margin revenue streams, and as these scale, they create additional upside for both top-line revenue and long-term cash flow.
  
• Sunrun's ability to safe harbor multiple years' worth of solar and storage equipment ahead of scheduled tax credit expirations reduces longer-term policy risk and enables the company to maintain revenue and earnings growth even if solar tax credits decline after 2028.
  
• The transition to more sophisticated offerings, such as home-to-grid virtual power plant programs, positions Sunrun as a critical energy resource for a strained electric grid, supporting the durability and strength of future revenue as decarbonization and electrification trends accelerate.
  
• Favorable state-level policies, grid modernization incentives, and durable secular demand for energy resilience and renewable integration, alongside Sunrun's leading brand and market share, enhance the likelihood of continued customer additions, supporting long-term revenue growth and stable or improving margins.

Valuation

• The assumed bearish price target for Sunrun is $7.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sunrun's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $213.4 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 12.3%.
• Given the current share price of $11.85, the bearish analyst price target of $7.0 is 69.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.