What a fantastic six months it’s been for Sunrun. Shares of the company have skyrocketed 138%, hitting $16.45. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Sunrun, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Sunrun Not Exciting?

We’re happy investors have made money, but we're swiping left on Sunrun for now. Here are three reasons why RUN doesn't excite us and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Sunrun’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 6.2% over the last two years. Sunrun isn’t alone in its struggles as the Renewable Energy industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Sunrun’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

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 $813.3 million of cash over the last year, and its $14.11 billion of debt exceeds the $1.01 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. After the recent rally, the stock trades at 22.8× forward EV-to-EBITDA (or $16.45 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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