Sunnova Energy Ticks Lower As Short Seller Calls For 80% Downside

Sunnova Energy International Inc NOVA shares are moving to the downside after Spruce Point Capital issued a short report.

Solar Industry Trends Prove Headwinds: The solar industry is shifting from third-party ownership such as leases and PPAs to 100% customer ownership, according to Spruce Point. Sunnova, however, continues to realize about 90% of its revenues from thirty-party ownership, the firm said.

New entrants into the loan market, shifting a large portion of financings through loans, are likely cannibalizing highly profitable solar renewable energy certificate revenue, according to Spruce Point, and the loss of investment tax credit will all hurt Sunnova.

Undifferentiated Business Model: Sunnova is a smaller player relative to peers doesn't offer a value proposition to differentiate it from its peers, the firm said. Sunnova's asset ownership is relatively light and its local dealer network increases counterparty risk.

"We have found several examples of concerning sales practices and other activities by Sunnova and dealer partners," Spruce Point wrote in its report.

Floundering Financials: Sunnova's top-line growth is slowing and reported margins are contracting, Spruce Point said. The firm also said the company's gross margins are inflated, relative to peers, due to two highly unusual industry practices – prepaid inventory and inventory accounting model.

"As the balance sheet continues to grow, the economics of the business are stripped out by debt holders and tax equity investors, leaving equity shareholders with an overleveraged business dependent on management assumptions that will likely never generate cash flow for equity holders," said Spruce Point.

The firm also sees a limited probability of an acquisition by Tesla Inc TSLA, since the EV maker's market share of the installation and financing market has declined since its SolarCity acquisition.

Spruce Point has a $5-$8 price target for Sunnova shares, suggesting 70%-80% downside from current levels.

Sunnova shares were down 3.3% to $25.84 at the time of publication. The stock earlier hit a morning low of $23.89.

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