ReneSola Ltd.: Dark Valuation

Summary

• ReneSola’s price has jumped from a low of about $4 to a high of $33.5 in a space of just 3 months.
• About 80% of the company’s humungous common stock worth $547 million has been eroded by its accumulated deficit.
• The company’s revenues and profits are just too insignificant compared to its large equity capital. Moreover, the competition is intensifying.
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Hype comes with an expiration date, especially in a volatile stock market. Renewable power stocks, especially those belonging to the solar gang, have been zipping ever since the Democrats won the elections and the Biden administration announced its plans of making our country a 100% clean energy economy (0% net-zero emissions) by 2050.

Take the example of ReneSola Ltd (NYSE:SOL). The stock was languishing around $4 in early November 2020, and by January 22, 2021, it had moved to a high of $33.5. It has reacted sharply since and is quoting at about $15 as of February 25, 2021, a price that is about 900% of what it used to be a year ago.

Let’s face it − SOL’s price gains are unrealistic and purely based on the hype and news surrounding the solar power sector. It’s time for the stock to walk the talk and prove that its valuations justify its market price.

So, are SOL’s fundamentals sound? Let’s find out:

Profitability

Image Source: SOL’s Income Statements

As per the latest data, SOL’s revenues of $9.7 million for the quarter ended September 2020 were a pale shadow compared to the $26.2 million revenues it generated in the previous quarter, which represented a period in which businesses were severely impacted by COVID-19. Its cash flows, quarter over quarter, are too negligible to even analyze. In the quarter ended September 2020, SOL generated -$1.9 million in operating cash flows compared to operating cash flows of $5.4 million in the quarter ended June 2020 and -$9.9 million in the quarter ended March 2020.

The numbers are too inconsequential when you consider SOL’s equity dilution and accumulated deficits:

Image Source: SOL’s Balance Sheet

About 80% of SOL’s common stock of $547 million has been wiped out by its accumulated deficit of $442 million. While the company’s accumulated deficit has remained steady between 2015 and 2020 (TTM September 2020), I estimate that its future net income, if and when it reports one, will be too insignificant to fill up the hole caused by its carried forward losses. For the record, here are its current net income/loss numbers (see the image below):

Image Source: SOL’s Income Statements

What’s even worse is that the competition in the solar space is increasing rapidly. Solar power equipment producers, EPC companies, and power generators are busy adding capacity and lowering margins to ensure they bag business. Solar tender prices are falling all over the world, and therefore SOL needs to increase its revenues and profitability at an exponential pace to generate meaningful returns for its shareholders.

It doesn’t matter to me that SOL has struck multiple partnerships with companies like Vodasun (Germany), Novergy (U.K.), and Innova (U.K.), or is reshuffling its existing solar assets portfolio. What matters is that its current profitability is sub-par and the competition is red hot.

Valuation and Short Interest

Image Source: SOL’s Valuation Sheet

SOL’s current revenues and net income numbers suggest that it will take a miracle for the company to make them meaningful. Even its forward ratios are very disappointing. Sample this:

1. A Forward Price/Sales ratio of 12.98 and a TTM Price/Book ratio of 7.17 compared to the sector medians of 1.62 and 3.07, respectively, suggest that the stock is extremely overvalued.
2. A Forward EV/EBITDA ratio of 86.81 compared to the sector median of 13.13 also suggests that the business is overvalued and the company’s market capitalization is at a very high level.

Both these key valuation metrics indicate that the stock is expensive.

SOL’s short interest of 7.66% as of February 26, 2021 suggests that shorts can be covered without causing a spike in its price.

Summing Up

I am unexcited about SOL as an investment because:

1. The competition in the solar EPC, solar power generation, and solar project management businesses is increasing, and margins are slimming down.
2. SOL’s current business seems too insignificant to trigger a turnaround in the near term.
3. On January 25, 2021, the company announced a sale of 10 million ADSs at $25 per ADS to expand its pipeline and to fund acquisitions. Though the stock is available at a discount to its issue price, the equity dilution will lower its EPS-potential going forward.
4. The stock has appreciated 900% in the last year. It defies logic and reeks of hype. Plus, the company does not have the profitability or the valuations to justify the current price.

I would, therefore, completely avoid SOL as an investment pick.

However, the stock can buzz around because its ADS pricing is higher than its market price, and therefore, if I were a trader, I would watch the charts and set up appropriate alerts.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.