Subdued Growth No Barrier To Sunrun Inc. (NASDAQ:RUN) With Shares Advancing 60%
Sunrun Inc. (NASDAQ:RUN) shares have had a really impressive month, gaining 60% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.
In spite of the firm bounce in price, it's still not a stretch to say that Sunrun's price-to-sales (or "P/S") ratio of 1.7x right now seems quite "middle-of-the-road" compared to the Electrical industry in the United States, where the median P/S ratio is around 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for Sunrun
How Sunrun Has Been Performing
Recent times haven't been great for Sunrun as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Keen to find out how analysts think Sunrun's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Sunrun's Revenue Growth Trending?
In order to justify its P/S ratio, Sunrun would need to produce growth that's similar to the industry.
Retrospectively, the last year delivered a decent 9.5% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 178% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 9.5% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 70% growth per annum, the company is positioned for a weaker revenue result.
With this in mind, we find it intriguing that Sunrun's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
The Final Word
Sunrun's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
When you consider that Sunrun's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.
Having said that, be aware Sunrun is showing 4 warning signs in our investment analysis, and 1 of those is concerning.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
