Sunnova Energy International: Potential Further Downside On Weak Fundamentals (NYSE:NOVA)

Investment Thesis

Sunnova Energy International Inc. (NYSE:NOVA) has been on a downward trajectory since hitting its 52-week high of $24.82 in July 2023. The stock has lost about 59%, trading at $10.22 today. Its share prices are trading near its 52-week support level of $8.35, which could be a good entry point. However, given the company’s weak fundamentals, I am bearish on the stock.

Further, the company faces headwinds such as high interest rates, which are increasing costs resulting in poor profits, as well as supply chain disruptions affecting the availability and delivery of solar and battery products. Although the company has some strong headwinds, I believe its weak financial health is limiting the company from exploiting the tailwinds, making me skeptical about its recovery from its current situation. Given this background and considering technical analysis, I recommend selling the stock and waiting for its fundamentals to improve before investing in this stock again.

Weak Fundamentals

NOVA is characterized by weak fundamentals in the name of high debt risk and weak profitability. Here are the highlights:

• NOVA has been making losses for the past four quarters, with a net loss of $252.6 million in the trailing twelve months. The company’s earnings per share [EPS] are negative, at -$2.2. In my view, this loss indicates that the company is unable to control its costs and expenses or that its revenue is insufficient to cover its operating activities.
• The company is heavily in debt, with a total debt of $6.37 billion and a debt-to-equity ratio of 3.37. The organization’s capital structure is strongly skewed toward debt, which raises financial risk and interest payments. This exposes the company to the risk of default, interest rate fluctuations, and reduced financial flexibility.
• The company has a negative return on equity of -16.22%, which means that it is weak in creating shareholder value and failing to generate profits from its invested capital. In my view, this reflects the company’s poor management performance and low profitability.
• Its stock performance has been poor, with a one-year return of -43.72% and a 52-week range of $8.35 to $24.82. The stock has been dropping since mid-September and is currently trading slightly above its lower Bollinger Band, indicating that it is under pressure and may continue to fall.

Given this background, these weak financial strength and profitability metrics could affect the company’s stock performance negatively, as they could reduce the confidence and trust of investors, analysts, and customers in the company’s future prospects and viability. The company could also face difficulties in raising capital, attracting talent, and competing with rivals in the renewable energy industry. The company’s stock price could decline further or experience high volatility due to these challenges.

Headwinds: Potential Catalyst For Further Downside

NOVA is currently faced with two major headwinds, which I believe have and will keep hurting the business until they subsidize. To begin with are the high interest rates. There has been a surge in interest rates, increasing the cost and reducing solar project profitability. With the interest rates expected to remain elevated for longer, NOVA is set to experience a longer spell of increasing costs and low profitability. Just to demonstrate how these growing interest rates have affected NOVA, the company’s total operating expenses have increased from $647.4 million in 2022 to $822.2million TTM, an increase of about 27%, and its interest expenses have increased from $107.8million to $226.8million in the same time frame, something I attribute largely to the increasing interest rates.

The other headwind is supply chain disruptions. Supply chain disruptions and component shortages have affected the availability and delivery of solar and battery products, as well as the margins and revenues of solar companies. This is because when supplies are limited, prices rise, increasing production costs and cutting margins. Furthermore, the uncertainty surrounding material availability affects production cycles, cost absorption, and forecasts. Given these challenges, NOVA will likely struggle with this challenge because its weak financial strength needs the flexibility needed to cope with such challenges.

Given this context, NOVA is confronted with two key macro-environmental challenges that require a high level of adaptation on their part to overcome. Unfortunately, adaptability necessitates a great deal of financial flexibility, which NOVA lacks due to its weak financial foundation, which is characterized by low profitability and large debt risks. As a result, I anticipate that the company will continue to struggle with poor margins until these challenges subside.

Tailwinds: A Possible Impossibility?

Even with the poor fundamentals and headwinds, NOVA appears to have some strong tailwinds, potentially propelling long-term solid growth. The first tailwind is the extension of the federal investment tax credit [ITC] for solar projects, passed as part of the Inflation Reduction Act 2022 [IRA]. The ITC offers a 30% tax credit for residential and commercial solar systems installed between 2022 and 2032 and then drops to 26% for systems installed in 2033 and 22% for systems set up in 2034. I believe this could boost the demand and affordability of solar installations and increase the returns for solar companies.

The other tailwind is the increasing awareness and preference for clean and renewable energy sources, especially due to climate change and natural disasters. Sunnova operates in several markets that are vulnerable to hurricanes, wildfires, and power outages, such as Puerto Rico, California, Texas, and Florida. I believe this strategic presence serves as a major growth lever. The company also benefits from favorable policies and incentives that support the transition to a low-carbon economy.

Based on these major tailwinds, NOVA may have the potential for growth, but I believe it is limited because the company is currently faced with very weak financial footing, which, in my opinion, limits the company’s ability to invest in new projects or capitalize on any emerging opportunities.

Technical Analysis

Here is my technical analysis of NOVA using many indicators. The MACD is below its signal line and has been declining since mid-September. This indicates that the short-term momentum is negative, and the stock is on a downtrend.

The RSI is below 50 (currently at 35.5) and has fluctuated between 30 and 40 since late September. This indicates that the security is oversold but shows no signs of recovery.

The Bollinger Bands are narrow and have been contracting since early October. This indicates that the volatility is low, and the security is in a consolidation phase. Further, the price is slightly above the lower Bollinger Band and has been testing it several times since late September. This indicates that the security is under pressure and may break down further.

Based on these indicators, I recommend selling NOVA or placing a stop-loss order to protect profits or limit losses. Alternatively, you may wait for some positive signals from the indicators before making any decisions, such as:

• The MACD crosses above its signal line and moves into positive territory.
• The RSI crosses above 50 and moves towards 70.
• The Bollinger Bands widening and showing an upward trend.
• The price breaks above the upper Bollinger Band and stays above it.

Conclusion

NOVA is facing significant headwinds, which limit the company’s capacity to profit on tailwinds when paired with its weak fundamentals. Furthermore, given the company’s weak fundamentals and current bearish momentum, as indicated by technical indicators, I recommend selling the stock to avoid further losses or executing stop-loss orders around $9.13, my current support level.