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Sunrun, Block, and Nvidia are analyst darlings
Peter Garnry
Chief Investment Strategist
Résumé: The top traded stocks among Saxo clients are also analyst favourites with a median upside from current price to price targets of 17%. In today's equity note we focus on Sunrun, Block, and Nvidia which are all three darlings of analysts. Sunrun is a US residential solar panel and battery storage company that has not lost its faith from analysts despite a share price that is down 44% this year and elevated default risk due to high debt levels and lack of profitability. Block is struggling with profitability and the recent outlook from Dutch competitor Adyen has soured investor sentiment on payment stocks. Nvidia is on everyone's mind as the company is the main beneficiary of the gold rush into generative AI.
Key points in this equity note
- Sunrun has the highest upside potential according to analysts among Saxo’s 30 most traded US equities. For this to come true, Sunrun must quickly increase its profitability.
- Block has recently seen their 12-month forward revenue estimates been raised by analysts despite the recent miss on volume from Adyen casting dark clouds over the entire payments industry.
- Nvidia remains the darling of Saxo clients, analysts and investors as the gold rush into AI means Nvidia is selling GPU at an insane rate. Nvidia’s 12-month revenue estimate has been raised 42% by analysts over the past three months.
Saxo’s most held and traded US equities
In this equity note we present a table of useful information on the 30 most held and traded US equities sorted on the difference between analysts target and the current price. A general observation is that the median upside to analyst targets is around 17% with Sunrun being the most bullish case seen by analysts with the price target sitting 146% above the current price. 12-month forward revenue estimates have not changed much for this group over the past three months except for companies such as Block (+5.7%), Nvidia (41.8%), and Meta (+5.6%) reflecting the AI growth wave and better than expected developments in e-commerce and online advertising.
Analysts are betting Sunrun to return to high growth
This year has been a disaster for renewable energy stocks, as we have written about multiple times, and recently the collapse in Orsted shares has put questions around the viability of offshore wind power amid high material costs and high interest rates. Despite a negative narrative in financial markets the with a jump by a third in 2023 compared to last year making it the largest absolute increase ever at 440 GW taking the total installed capacity of renewable electricity production to 4,500 GW (equal to the total power output of China). Two thirds of the increase in capacity this year is coming from solar. It looks increasingly like solar will be the dominant renewable energy source in the future.
Sunrun is the leading US home solar panel and battery storage company which has grown from a $859mn revenue business in 2019 to estimated $2.35bn in 2023. The company is still not profitable with an expected negative EBITDA of $263mn in 2023. From high growth rates during the pandemic (75% in 2021) revenue growth has slowed to just 1% in 2023 and the debt has ballooned to around $11.5bn. As a result, the default probability has risen dramatically since 2020 with Bloomberg’s default model score sitting just one notch above default. Sunrun shares are down 44% this year and the company has to quickly prove a path to profitability to avoid a potential restructure.
The residential solar market is tough in the US with financing rates at much higher levels compared to the high growth years of 2020 and 2021. On a positive note, Sunrun is growing faster than its peers and its virtual power plant strategy is beginning to bear fruit compared with good uptake in its battery business. Sunrun expects to generate $200-500mn y/y cash generation over the coming quarters and has said that it needs no recourse financing. The investment thesis relies heavily on the path to positive cash generation and revenue growth rates hitting 15% in 2025.
Adyen has put Block and the entire payments industry into trouble
The payments industry was one of the big winning themes of the pandemic and growth looked sure for decades to come inflating valuations to insane levels in late 2021. Since then, as a function of lower growth and higher interest rates, valuations have come down hard. Investors have gone from valuing Block at 5.6x enterprise value to sales in 2019 to 1.6x in 2023 reflecting lower expectations for growth but also operating margin as the industry has matured and technology advantages have converged among industry players. Adyen latest big miss on volume and operating margin was a big hit to the industry and has raised questions about whether payment companies outside American Express, Mastercard and Visa will ever be as profitable as the big three.
Block, formerly Square, generated revenue of $19.7bn in the last 12 months with EBITDA of $225mn (1.1% operating margin) and thus it is quite clear that investors want to see the operating margin expand. The industry narrative has changed to that of profitability instead of high revenue growth at all costs. Analysts remain bullish on Block with an upside of 55% to their price target.
Nvidia remains center of attention for analysts and investors
The AI hype and outrageous growth that Nvidia is experiencing have caught everyone’s attention in equity markets this year. 12-month forward revenue estimates are up 42% over the past three months which is something we have never observed before for a $1.1trn market value company. Not only is Nvidia growing fast it is also highly profitable (33% operating margin and expanding). Analysts are also maintaining their positive outlook with a price target 43% above the current price despite the strong performance already this year.
As we have noted in a recent equity note, the key risk for Nvidia shareholders is that the huge demand increase is driven a lot by the long tail of VC-backed AI startups that have gone all in on the gold rush. For Nvidia’s growth to continue over the coming year it is important that this gold rush into AI turns into commercial ideas that can be monetized on a grand scale. Adobe earnings Thursday after the US market close might give a clue of whether this is possible.