The past six months have been a windfall for Sunrun’s shareholders. The company’s stock price has jumped 117%, hitting $18.15 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Sunrun, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Is Sunrun Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons why RUN doesn't excite us and a stock we'd rather own.
1. Revenue Growth Flatlining
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Sunrun’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years. 
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Sunrun’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 38.4%, meaning it lit $38.42 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Sunrun burned through $779.9 million of cash over the last year, and its $14.69 billion of debt exceeds the $1.16 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Sunrun’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Sunrun until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Sunrun isn’t a terrible business, but it doesn’t pass our quality test. Following the recent surge, the stock trades at 30.1× forward P/E (or $18.15 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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