We think that Sunrun Inc. currently is a better solar technology bet compared to First Solar Inc.. First Solar stock trades at 3.6x trailing revenues, lower than that of Sunrun, whose P/S multiple stands at almost 5x. Does this gap in the companies’ valuations make sense? We believe it does, and we only expect this gap to widen. While both companies weren’t significantly hampered by the pandemic, Sunrun has seen more rapid and consistent growth over the past five fiscal years than First Solar. Sunrun’s revenues have grown 3x since FY ’16 and currently stand at $1.5 billion on an LTM basis. At the same time, First Solar’s sales first dropped from $2.9 billion in FY ’16 to $2.2 billion in FY ’18, before soaring to $3.1 billion in FY ’19. However, First Solar’s sales now stand at $2.6 billion on an LTM basis.
Having said that, we dive deeper into the comparison, which makes Sunrun a better bet than First Solar, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth. Our dashboard First Solar vs Sunrun: Industry Peers, But Sunrun Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. Sunrun Ahead On Revenue Growth
Sunrun has witnessed much faster and more consistent revenue growth over the years. Sunrun’s sales have jumped from $0.5 billion in FY ’16 to $1.5 billion on an LTM basis, while First Solar has, in fact, seen revenues drop from $2.9 billion to $2.6 billion over the same period, with a very inconsistent sales trend, as can be seen below.
Additionally, Sunrun’s pre-Covid annual sales growth stands at 26.3%, much higher than First Solar’s 4.7%, whereas growth during Covid, too, stands at 7.4%, much better than FSLR’s -11.5%. Further, a look at recent trends reveals that Sunrun witnessed more than 2x YoY sales growth for its most recent quarter (Q3 ’21), compared to First Solar’s -37.1%.
Finally, LTM and last three FY sales growth for Sunrun stands at 76.8% and 21% respectively, much more than First Solar’s -25% and 0.4%.
2. EBIT margins: First Solar Ahead
First Solar’s P/EBIT ratio stands at around 20x currently, while Sunrun still has negative EBIT margins. Sunrun’s LTM EBIT margins currently stand at -46.7%, much lower than First Solar’s 17.9%, and Sunrun is also behind in terms of LTM margin change compared to the last three fiscal years, with -16.3% growth vs First Solar’s 14.6%.
3. Finally, Sunrun Is Ahead In Terms Of Expected Returns
Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Sunrun is the better choice. Sunrun’s LTM revenues of $1.5 billion are expected to rise at a CAGR of 17.7% as per our estimates, taking revenue numbers three years out to as high as $2.4 billion. Assuming Sunrun’s P/S ratio to remain roughly unchanged, this still means that the market cap would rise to $12 billion, an upside of more than 70% over three years.
In comparison, given historical trends, we expect First Solar’s sales to rise slower at a CAGR of around 10%, taking revenue in three years to $3.5 billion. However, considering the P/S for First Solar to pull back to historical averages of around 3x, we estimate a market cap of $10 billion for First Solar, roughly 10% higher than the level it is at today.
The Net of It All
Despite First Solar’s revenues being larger than that of Sunrun’s, the latter has seen faster and more consistent revenue growth lately, but is still in a growth phase and has much lower margins than First Solar. Having said that, our comparison of the post-Covid recovery above, shows that Sunrun has shown a much stronger growth than First Solar, and we believe profitability will catch up soon enough. Due to this, we believe that Sunrun deserves its higher P/S multiple compared to First Solar, and we believe that this gap in valuation may only widen. As such, we believe that Sunrun stock is currently a better bet compared to First Solar stock.
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