Solar Growth Ambitions Shine, Yet Analysts Foresee Profit Margin Eclipse

Key Takeaways

• Altus Power's strategy to enhance revenue and efficiency emphasizes technology and early-stage project execution, aiming for faster conversion of opportunities into revenue.
  
• Strengthening educational outreach and strategic partnerships, like with CBRE, aims to increase commercial solar adoption and improve project acquisition efficiency, potentially boosting revenue and margins.
  
• Altus Power's growth and revenue are challenged by project delays, financial guidance revision, reliance on community solar expansion, and risks in asset acquisition strategy and sales execution.

Catalysts

A clean electrification company, develops, owns, constructs, and operates roof, ground, and carport-based photovoltaic solar energy generation and storage systems.

• Altus Power's reprioritization of resources towards technology and analytical teams aims to enhance revenue and operating efficiency by optimizing the revenue generation from their solar project portfolio, potentially leading to an increase in revenue.
  
• By focusing on early-stage project execution and increasing the velocity at which opportunities convert into revenue-generating assets, Altus Power aims to expand its footprint and leverage its market agility, which might result in accelerated revenue growth and improved net margins.
  
• Strengthening the educational outreach and client engagement, especially in high-demand markets, intends to amplify commercial solar adoption, potentially expanding Altus’s customer base and impacting long-term revenue positively.
  
• Refining the partnership with CBRE and targeting a market-specific approach for client engagement could streamline the sales process, enhancing the efficiency and effectiveness of project acquisition and development, likely to result in increased revenue and higher EBITDA margins.
  
• Altus Power's strategic focus on leveraging its existing portfolio for redevelopment and optimization opportunities underlines a forward-looking approach to asset management that could enhance the long-term shareholder value by potentially increasing the earnings and net income through additional value extraction from these assets.

Assumptions

• Analysts are assuming Altus Power's revenue will grow by 20.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.5% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $453.3 thousand (and earnings per share of $0.03) by about November 2027, down from $23.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $75 million in earnings, and the most bearish expecting $-22.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 234.3x on those 2027 earnings, up from 25.2x today. This future PE is greater than the current PE for the US Renewable Energy industry at 25.6x.
• Analysts expect the number of shares outstanding to decline by 54.42% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Risks

• Altus Power faces delays in utility and interconnection processes for new build projects, which could lead to slower growth and impact expected revenue timelines.
  
• A revision in financial guidance for 2024 suggests that expected growth might be slower, impacting revenue and adjusted EBITDA forecasts.
  
• The company's reliance on the expansion of its community solar business, and the need to ramp up customer subscription levels to match generated solar credits, could lead to deferred revenue recognition, affecting short-term revenue flow.
  
• The strategy to focus on acquiring operational assets presents a risk if anticipated consolidation in the solar market or high interest rates affect the availability or pricing of suitable assets, influencing the balance between asset acquisition and organic growth.
  
• Execution risks in education and engagement strategies, particularly in enterprise sales, where efficiency and effectiveness in client engagement need improvement, could slow down market penetration and revenue growth from new contracts.

Valuation

• The analysts have a consensus price target of $5.56 for Altus Power based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $302.2 million, earnings will come to $453.3 thousand, and it would be trading on a PE ratio of 234.3x, assuming you use a discount rate of 8.4%.
• Given the current share price of $3.65, the analyst's price target of $5.56 is 34.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.