Between October and January, the Sunworks (NASDAQ:SUNW) share price rose a spectacular 1,160%. Since then, it’s plummeted 47%. So, is Sunworks’ share price run overdone or can it retrace its previous highs?
What does Sunworks do?
Sunworks is a solar power company providing high-performance solar power systems to homes and businesses. It has three subsidiaries, Sunworks United, MD Energy and Plan B Enterprises. It designs, sells, and installs solar panels from as small as 2kW for residential needs to multi megawatt systems for offices, manufacturing plants, warehouses, dairies and much more.
Last year, the solar energy system provider achieved around 74% of its revenue from sales to bigger markets and the rest to the residential sector.
Over the years, Sunworks has gone through several makeovers. It was originally MachineTalker in 2002 and became Solar3D in 2010. Following this, it made acquisitions of its subsidiaries Solar United Network, MD Energy and Plan B. Finally, it changed its name to Sunworks in 2016.
Today, Sunworks is mainly focused on growing its market share throughout California but it’s also keen to expand throughout the US. The solar industry is competitive, but Sunworks is confident it can scale through acquisitions. Growing through acquisitions is a great concept, but if it doesn’t have the cash to acquire this may lead to share dilution.
It’s increasing its marketing spend in targeting the residential market as it believes it has a superior quality product to offer, with great customer support.
Is Sunworks a risky investment?
Sunworks has incurred significant losses since inception and cannot give any guarantee of future profitability. In fact, its annual report published at the end of March shows a significant number of reasons to approach this stock with care.
The ongoing pandemic is causing it to lose money and solar energy is still a relatively new energy source that has not been widely adopted by the residential sector.
Unfortunately, there are many factors that could cause this company to lose market share. Perhaps this is the reason for the heightened short interest in the stock. By March 15 short interest in Sunworks had risen 37% from February 28. Today, short interest is around 7%.
In August 2019 the company split its stock at a ratio of 1-for-7. This could have been a good thing, but the share price declined. A year later it opted to reduce its shares of authorized common stock to 50 million. Today the company has a $415m market cap and 27m shares outstanding. It also appears to have more cash on hand than debt which is a good sign.
Covid-19 led Sunworks to cut its workforce and make more use of subcontractors when necessary.
It’s also reliant on a direct supply chain for its solar panels, inverters, batteries, and materials. It buys these directly from multiple manufacturers and distributors. This poses a disadvantage as any supply chain problems could lead to reduced margins and profitability. However, its use of several suppliers, over one, does help mitigate this risk.
Sunworks also carries out installations for which it needs to follow strict community approval processes with local agencies and utility companies. This has the potential to cause delays and draw out contracts.
With a national drive on renewable energy solutions, there’s lots of funding to be had. For instance, farmers receive agricultural loans to help them fund a solar installation. This accounts for a chunk of Sunworks business.
Sunworks is small compared to many of its competitors but it believes it’s able to compete. Although, its 2020 revenues were down 36% year-over-year.
There are a few things to like about Sunworks and it may well battle on to generate sales and ultimately profitability. However, it does seem to have reached a point that makes the share price overvalued considering the ever-present risks.