Pineapple Energy: Home Solar Is Renewable Energy’s Next Big Thing (NASDAQ:PEGY)

Energy Efficient House With Solar Panels And Wall Battery For Energy Storage

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Earlier this year a little-known company called Communications Systems based out of Minnetonka, Minnesota acquired a home solar company and then changed its name to Pineapple Energy (NASDAQ:PEGY). If the rationale for the buyout was to tap into buoyant investor enthusiasm for companies driving forward the climate economy then the performance of the common shares since the acquisition would likely have been disappointing.

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It’s not hard to see why Pineapple is down 45.4% year-to-date and underperformed the broader solar industry, with the Invesco Solar Portfolio ETF (TAN) only down 21.4%. It just formed a few months prior at a corporate level and does not have the long-dated operational history of a peer company like Sunrun (RUN). Indeed, Pineapple Energy is an amalgamation of a synergistic mix of what were completely separate firms going into 2022. This constitutes Sungevity, E-Gear, Hawaii Energy Connection, and Horizon Solar Power. Fundamentally, all of these provide US homeowners with products from solar, battery storage, and grid services that enable them to decouple from fossil fuel-dominated grids and reduce their electricity bills.

Executing In The Shadows As Its Product Creates Energy From The Sun

Pineapple last reported earnings for its fiscal 2022 second quarter saw revenue come in at $5.89 million, above operating losses of $3.2 million and up sequentially from $318,000. Growth at the company’s core Hawaiian operations was impressive with year-on-year growth of 75% in the number of systems sold. Batteries sold were up 137% year-over-year with an attach rate of 84% as pending installs, or customer backlog, grew by 75% and customer acquisition cost per watt was down 37%.

Residential Solar Estimated Market

Pineapple Energy

The company expects its total addressable market to grow to reach $41.8 billion on the back of an 18% compound annual growth rate of $13 billion from 2023. This is as the Inflation Reduction Act is set to accelerate the deployment of US home solar installs.

The current US administration has made reducing carbon emissions a key pillar of their economic policy and Pineapple stands to ride this zeal to new highs with revenue growth likely to remain strong for the foreseeable future. Of course, from the government’s perspective, home solar installs will aggregate into a larger effort that includes nuclear, utility-scale solar and wind energy projects. These will all be to meet an ambitious goal to reduce greenhouse gas emissions to 50% below 2005 levels by 2030.

The IRS is set to provide homeowners with dual 30% tax credits on solar systems and energy storage technologies. This would see Pineapple’s customers get back nearly a third of the cost back from systems purchased. From a homeowner’s perspective, by producing and storing energy at their own homes with rooftop solar panels and rechargeable lithium-ion batteries, they will be able to materially constrain their carbon emissions and partially decouple their demand from what remains a fossil fuel-dominated electricity grid. Further, it will help them embed the resiliency needed in periods when rolling power cuts happen. It would also essentially create a source of positive cash flow after the initial cost of purchasing and installing the system is paid back from cheaper utility bills as solar’s cost per KWh is increasingly getting cheaper for a lot of states that Pineapple plans on expanding into. Indeed, August electricity bills for US consumers were up by 15.8% year-over-year, the most significant gain since 1981.

The company exited the quarter with cash and liquid equivalents of $14.4 million which management stated will provide enough runway to execute their expansion plans and chase further incremental revenue opportunities from heat pumps to commercial solar and EV charging. The company is also planning nationwide expansion outside its core Hawaiian market to other attractive states for home solar installs and will likely use an acquisition to achieve this.

For Households, It’s An Investment In Their Future

Total revenue for full-year 2022 is likely to come in at not less than $15 million assuming revenue for its last quarter remains flat. Actual revenue is likely to be materially higher as the company builds on momentum established since going public. This would mean a 1.86x price to full-year 2022 revenue multiple. Whilst this is lower than competitors, Pineapple is a lot smaller and comes with significantly more risk so the discounting is justified.

The broader macro environment remains positive with the decarbonization of energy now forming one of the most immediate post-pandemic needs for US policymakers racing to reduce the country’s contribution to anthropogenic climate change and reflect commitments made in the 2015 Paris Agreement. The company is a relative minnow in an industry set to see material growth. Hence, common shares could be attractive to an investor looking for asymmetric exposure to what is set to be a secular growth market. I’m not a buyer here yet though, as continued economic headwinds and rising rates spark more volatility and the risk-off trade likely continues into 2023.

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