1 Solar Stock with Serious Upside Potential

Residential solar company Sunnova Energy (NYSE:NOVA) has seen its revenues skyrocket in recent years as consumers turn to solar for more sustainable and reliable home power.

In the face of rising rates and a tighter consumer market, however, Sunnova shares have fallen by more than 50 percent year to date, creating a potentially attractive buying opportunity.

Is Sunnova Energy a Good Investment?

In the company’s Q2 report, Sunnova reported 39,000 new customers, bringing its total customer count to over 348,000.

Revenue grew by 13 percent year-over-year, rising to $166.4 million for the quarter.

Due largely to higher interest and administrative expenses, however, the company’s net loss widened from $0.36 per share a year ago to $0.74 in Q2.

Sunnova’s customer acquisition efforts formed a bright spot in the report when management stated it is on track to increase its total customer base by around 40 percent throughout 2023.

One of the most compelling arguments in Sunnova’s favor is its rapid rate of revenue growth over the past several years. In 2018, Sunnova generated just $104 million in revenue. Over the most recent 12-month period, that number has risen to $673 million.

While revenue growth slowed considerably this year, Sunnova’s overall performance in this category has been highly impressive.

It’s important to note, however, that Sunnova still carries a fair amount of risk. One of the most glaring risk factors for the company is its large debt load, which currently stands at 3.2 times total equity.

In a rising interest rate environment, this debt may hinder Sunnova’s ability to keep up its growth rate. In Q2, interest expenses totaled $56.9 million, up from $24.6 million in the year-ago quarter.

Sunnova is also rapidly spending down its cash reserves as it invests in its growth initiatives. The company ended 2022 with $360.3 million in its cash reserves but had $187.3 million in cash and equivalents by the end of Q2.

It should be noted that Sunnova’s total assets rose from $8.34 billion to $9.61 billion over the same period. However, a shrinking cash reserve could force the company to take on further debt or issue additional shares in order to fund further growth.

Overall, Sunnova appears to have significant potential as a long-term investment. By 2030, estimates suggest that about 13 percent of homes in the US will rely on power provided by solar panels. This long-term growth trend will likely provide ongoing support to companies like Sunnova.

As the US moves closer to carbon-neutral targets later this century, continued government support and funding for solar installation are likely to remain fairly consistent. Given its solid execution in terms of revenue and customer acquisition up to this point, it seems reasonable to suppose that Sunnova will continue to take full advantage of these trends to power its own growth.

Is Sunnova Energy Profitable?

Despite its long-term potential, Sunnova Energy is not currently profitable. The company achieved profitability for a single quarter in Q4 of 2019 but has lost money in each quarter since.

Over the last year, Sunnova has lost about $161.6 million, or $2.16 per share.

While losses are expected to be narrower in the coming year, analysts forecast that Sunnova will continue to lose money through at least 2024.

What Is the Stock Price Prediction for Sunnova Energy?

The median target price for Sunnova shares over the coming 12 months is $20.50. Compared to the most recent price of $8.63, this would give Sunnova a potential upside of 138.6 percent.

Due to the high levels of volatility implied by this projection, however, investors would likely do well to assume a more realistic and potentially bearish outcome.

Luckily, even the most negative analyst price forecast suggests that Sunnova will rise by over 28 percent to reach a target price of $11.

Is Sunnova Energy Stock Undervalued?

Although Sunnova is not expected to generate positive earnings for some time, there are indications that the stock could be on sale. Chief among these is its price-to-sales ratio, which is just 1.8x.

For a company with such rapid revenue growth, this ratio is quite low and may suggest a good deal is on hand. It also trades at just 0.58 times book value, another potential signal that it is below its intrinsic value.

Sunnova Energy is undervalued by 35.3% with fair value sitting at $11.63 per share according to a discounted cash flow forecast analysis.

Is Sunnova a Buy or Sell?

Despite some concerning financial metrics, Sunnova is an attractive Buy for risk-tolerant investors looking for chances to beat the market.

Of the 28 analysts covering the stock, 18 rate it as a buy. Institutional buying has also outpaced selling over the last 12 months.

Institutional investors have acquired about $516 million worth of Sunnova shares, while institutional selling totaled just $295 million. The disparity between buying and selling indicates that Wall Street is still fairly bullish on Sunnova’s long-term prospects.

Why Is Sunnova Stock Dropping?

One of the biggest drags on Sunnova and the solar industry in general has been the sustained increase in interest rates over the past year.

With financing for residential solar projects becoming increasingly expensive, consumers have been less willing to buy solar panels.

At the same time, companies like Sunnova have found themselves paying more to fund their growth, resulting in an increasingly difficult business environment.

More recently, solar stocks across the board fell when Sunnova competitor SolarEdge released its preliminary Q3 sales data.

The company reported that it would be missing its sales guidance by nearly 22 percent, driven in large part by customer cancellations during the quarter. This report showed the difficulties of the macroeconomic environment for solar companies at the moment,

Are Solar Stocks a Good Investment Right Now?

In the long run, solar stocks are likely decent growth investments. It should be noted, however, that companies like Sunnova and SolarEdge are both vulnerable to poor performance in the short term.

As such, investors eyeing solar companies should be comfortable with long holding periods and the possibility of substantial volatility as these companies adapt to a higher interest rate environment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.