Will Sunrun Keep Shining?
Featuring Fahad Khalid
Published on: July 22nd, 2019 • Duration: 15 minutesSolar stock Sunrun has nearly doubled since the start of this year, but Fahad Khalid, CEO of Jaguar Analytics, says that significant upside remains ahead. He discusses the specific catalysts for growth, and lays out his time horizon for the trade, in this interview with Jake Merl. Filmed on July 19, 2019.
JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down with Fahad Khalid, Chief Executive Officer of Jaguar Analytics. Great to have you back on the show.
FAHAD KHALID: Thank you for having me.
JAKE MERL: So, what are we looking at today? What's your trade idea?
FAHAD KHALID: So, we wanted to bring an idea to this presentation that is going to be a beneficiary of an important mega trend that is emerging. And that's in solar space. And our pick in that space is Sunrun, symbol RUN.
JAKE MERL: So, I know Sunrun has a pretty big presence in California. And actually, they're a big competitor to Solar City, which is Tesla's solar company. So, can you please break down what's going on in the West Coast and why you're so bullish on the company?
FAHAD KHALID: Absolutely. Now, one of the major events that happened in the past six months is that there was a California solar mandate that went into effect, a very bold, legal step forward that essentially now requires effective January 2020. So, another six months from now, that all single family home as well as multifamily homes of three stories or less in California must go solar. This is a very bold step by a state that is generally usually on the driving seat of pushing the boundaries towards the towards all kinds of new technologies.
Now, we believe that the growth as this, even before this mandate goes into effect next year, was already strong enough. And this will just incrementally provide the boost to the companies. And there's a few companies that are targeting this a spot that have the lead at this particular time based on the product mixes that they have in the market, the partnerships they're signing with homebuilders, and we believe one of those companies that's going to be is Sunrun.
JAKE MERL: And so how much growth are you expecting from this mandate?
FAHAD KHALID: If you look at the last quarter, the company had a phenomenal growth rate. They've reported revenues of 35% year over year, reaching $198 million in the first quarter. But important part of that was it beat the consensus materially which was at $168 million. But for the rest of the year, the company conservatively is guiding a total solar deployment of midpoint of about 17% year over year, which is typical when you guide conservatives so you can beat those numbers. So, we believe for the rest of the years, those numbers will go up.
But more important thing is that when the solar mandate actually kicks in, starting from January 2020, we believe the growth rate from that point on will go in a hyper rate. Now point about this, I should mention, about 80,000 homes are sold in California each year. These are single family homes. But the actual mandate calls for anything, any dwelling with three stories or less to must have solar panels, fully powered with solar panels effective January 2020 and beyond.
When you add the multifamily component to the actual single family home component, the total incremental demand is now 135,000 homes per year. Currently, at this rate before the mandate kicks, in only 15,000 homes per year come with solar installation. So, there's a massive gap there that needs to be filled by selective companies, Sunrun being one of them.
JAKE MERL: And so how important is California specifically to the business of Sunrun?
FAHAD KHALID: Well, the company has a commanding market share of 15% in California. Interesting point about that is that the market share was 6% in 2014, it jumped to 9% the next year, then 11%. And it's been steadily rising and rising reaching 15% in late 2018. And we believe it's going to go to 19%. Now, there's a key reasons for this to which is not well understood by the markets, in my opinion, because in the last year and a half, the company has hired or stole essentially plenty of talent from Solar City, which is owned by Tesla.
So, if you actually see the chart, you will see that Solar City market share has gone down while Sunrun has gone up. The real competitor to Sunrun is actually SunPower. The difference between however, SunPower and Sunrun is that SunPower doesn't have a few other elements we'll talk about such as battery packs, which is now are being combined into one simple package, as well as it doesn't have the utility size work offerings that Sunrun is providing.
JAKE MERL: So, you mentioned batteries there. Are you looking at any growth opportunities outside of California in that area?
FAHAD KHALID: Yes, absolutely. Now, Brightbox, it's the battery pack that Sunrun makes. Now, this product is started in December 2017. That's when they launched, it's been out for only a year and a half. The interesting part about this is that the- so they have the separate business, which is all the solar installations, but the battery pack came in much later. So, naturally, their first inclination was to start selling it to their existing customer base, which the install base has increased to a very large sum already over three gigawatts of power that's out there that's now representing their customer base.
So, they're selling it into them. And since the inception, they have sold 5000 of these batteries. Just last month, June 3rd, is when they launched these Brightbox battery packs in two major markets, right here, New York City and New Jersey. So, they're getting into now the spots where you get much more volume growth. So, we believe that 5000 install base of battery pack is nothing compared to when you consider the solar mandate in California alone is going to open the market including three stories and under all dwellings 135,000 per year. And when you combine that with a package that they're putting together of battery packs, and the solar systems combined, we believe market becomes very, very big for these Brightbox instruments.
JAKE MERL: So, in terms of Sunrun's business model, it seems like they're focused on residential and these new battery packs. But are they also looking at commercial spaces and businesses as well?
FAHAD KHALID: Yes. So, there's two things that we found in our research in the last several months or so. California- because remember, California's solar mandate was passed in December 2018. So, what it has essentially done, it has opened the eyes of all of the major markets. And they said, okay, we're setting the precedent over here, and you need to go into the same direction. So, the first thing that happened was that the city of LA has a fossil fuel plant, which is now being decommissioned. It was started in February. And it's a fossil fuel plant power 75,000 homes in LA.
Now, that entire project is now going to be converted to solar and they're looking for one company to take on the entire project. That catalyst is out there, it has not been decided yet who is going to actually win that particular contract. We believe it has a very good chance, particularly because not only the market share, but the actual contracts they have been finding, they've been doing with homebuilders.
The second major utility contract that is coming into play is going to be right here in the state of New York. It was decided sometime in April, I believe, that the state of New York is going to decommission and go 100% coal-free by the end of 2020. Now, what does this mean? If you actually look at all the solar, all the power sources in the state of New York, about three gigawatts, which is to give you the context around this, this is as much as the entire more than half the country of Spain in terms of total power consumption, including Barcelona over there, that is going to be now converted from coal, will go from coal-free to solar, and it has to happen by 2020. They're starting to take bids for this. And that's going to be the more catalyst that will come into play later in 2019, as well as 2020.
JAKE MERL: So, there are a lot of great near-term catalysts for Sunrun. However, I was just reading an article that said the Federal Tax Credit here in the United States is actually running out next year. How do you think that will impact your thesis?
FAHAD KHALID: What we have found in our research in the past, and this is not only just for solar installations, but we've also seen this with wind power, we have seen this with the electric vehicles, the idea of tax credits driving the consumers' buying patterns and the decision making used to be a significant factor at one point in the history. But we don't believe it's an important factor anymore going forward. First of all, a lot of the state and the federal subsidies both internationally as well as in United States had been cut, or if they have not been cut, then they have been basically frozen up to a certain point after which they just go away based on income levels and based on total company's production levels.
Those factors were definitely relevant at one point and to certain extent, one could argue they still are, but we don't believe that from a consumer standing, from consumer buying standpoint, that play is such an important factor anymore.
JAKE MERL: And so tying this all into an actionable trade idea, let's take a look at the stock. Would you be recommending buying it here at current levels, because we have seen a really big move?
FAHAD KHALID: Yeah. So, regarding this big move, a side the story that perhaps is important to bring up, if you look at the chart, you will see that it has been breaking out, consistently making higher highs and higher lows for the past three months or so- two to three months or so. The reason actually for this might very well be Tiger Global, which is a large institution that has been building a very large stake in the company. Tiger Global started buying the position early May. And based on the most recent 13D filing with the SEC, they have accumulated 21.8 million shares by coming to the market and adding to positions practically every single week, representing 19% of the entire company.
So, we have a lion's share of the market now in the hands of Tiger Global, they have been the biggest buyers. And I think that's why you see spikes and volumes over here. So, from our standpoint, technically speaking, unless there's a reason to believe that this large shareholder that has amassed this major stake is going to go away, there's no reason to believe that a material pullback will be in the cards. So, that sets the trend that it's still gradually higher, we believe momentum traders will see this story play out over time, we believe the stock will trend higher continuously from here. So, we're a buyer right here at this particular spot in the stock. And we believe that by 2020, this will trade north of $30 per share.
JAKE MERL: And in terms of defining your risk, where would you put your stop loss?
FAHAD KHALID: At this particular time, fundamentally speaking, you're at the cusp of a potential major start of a product cycle. So, we have the mandate, we have the utility work coming, we have the battery packs that are going to be installed- there's a lot of factors, you have large institutional holders building positions over here. We do like putting a stop loss here about 15%, where the stock is trading currently. So, we put the stop around $17.50 to $18 per share. But we would remind you- and as we always does with our clients that one has to be a little bit diligent about when a pullback does come, whether it's related to a stock specific story that may change the fundamental picture that we are presenting over here or is it because we are in a generally slowing economy economic environment right now.
And we know we see a material pullback in the entire market. And so that causes the stock to pull back in sympathy. Events like that at the macro level that knocks the entire market down, we would actually suggest buying and adding to position on any weakness. But unless the story changes, we're buyers on weakness with a stop at $17.50 and such.
JAKE MERL: And over what time horizon do you expect it to reach that $30 level?
FAHAD KHALID: So, stock currently around $20. So, that $30 means we're looking at about 50% upside from here, we believe 12-month target. So, the way I come up with a $30 price target with the 12- month horizon is because I believe that this would be the moment when the accelerating trends will begin. And you have to give it enough time to see it actually play out in the chart, as well as fundamentally. So, how much time? I believe 12 months, we'll see enough rockers that should carry the stock to $30 plus.
JAKE MERL: And so taking all this into consideration, what would you say is the biggest risk to this trade?
FAHAD KHALID: The biggest risk to this trade is a one that popped on our screens about two to three years ago. We don't believe it's a major risk now. But it's always a possibility, which means that a lot of the times, the margins on these solar panels get crushed when the international solar panel makers flood the United States with their product, cheap product particularly made in China. And we saw this play out in steel and a whole bunch of other industries. But we currently have a president in the White House that just won't let that happen anyway.
So, it was a risk in the prior administration and has been in the past as well, where we would see that yes, the deployment, solar deployments is increasing, but the margins have been compressed because of oversupply. We don't believe that's the case at this particular time. We believe that there's enough duties have been imposed on international sellers over here that is going to prevent them from actually flooding the US market.
JAKE MERL: Well, Fahad, that was great. We'll see how it plays out in the months to come. Thanks so much for joining us.
FAHAD KHALID: Thank you very much for having me.
JAKE MERL: So, Fahad is bullish on Sunrun, ticker symbol RUN. Specifically, he likes buying it at current levels with the stop loss at $17.50 and a target price of $30 over the next 12 months. That was Fahad Khalid of Jaguar Analytics and for Real Vision, I'm Jake Merl.