Can This Solar Installer Be the Next SolarCity Corporation?

In a short time on the public markets, SolarCity (SCTY.DL) has upended the energy industry and quickly become the most valuable company in solar. But it isn't the only company involved in installing residential and commercial solar projects, a market that is still extremely fragmented around the country. One company investors should keep an eye on is Real Goods Solar (NASDAQ: RSOL), or RGS Energy after it recently announced a name change, the fifth largest residential solar installer in the country. 

What is RGS Energy?
RGS Energy is a company that's been around since 1978, selling solar products and building systems around the country. It is currently focused on building residential and commercial systems in the Northeastern U.S., Colorado, and California.

Like SolarCity, RGS Energy offers residential and commercial systems to consumers through either sale or lease options. Unlike SolarCity, the company doesn't do the leasing work itself. Instead, it uses specialized companies like Sunrun and Clean Power Finance to provide leasing services that bring in equity investors and even uses these companies to provide support like quoting tools.

SolarCity workers installing a rooftop solar system. Image courtesy of SolarCity.

This reduces the scope of RGS Energy's business, allowing it to focus on sales and installations. It also reduces the amount of capital the company must put into projects, something SolarCity need to finance for years to come.

The downside is that SolarCity controls the entire installation process and has more upside from controlling the financing. There's potential to make more money by controlling the entire system and time will tell which strategy is the most valuable to investors.

Putting RGS Energy's business into perspective
Before thinking RGS Energy and SolarCity are too similar, it's important to put the businesses into some perspective. RGS Energy is much smaller with a $136 million market cap versus $5.9 billion for SolarCity and its operations are also much smaller as well.

Here's a look at where installations, customers, and revenue stand as of the end of last quarter.

Source: Company earnings releases

You can see that SolarCity installed 7.3 times as much solar as RGS Energy in Q3 and has 5.1 times as many systems installed. But on the revenue side, SolarCity only generated 43% more revenue in Q3. This is due to the fact that SolarCity keeps systems in-house, financing projects itself, as opposed to RGS Energy, which sells the projects to customers or leasing companies. Sales result in one-time revenue while leases generate revenue for up to 20 years.

What you're getting with RGS Energy
If you buy shares of RGS Energy you're betting on a very different business model than what SolarCity provides. SolarCity sells, designs, and finances solar installations, even getting into the manufacture of some parts like racking. RGS Energy is focused on sales and installations, leaving the financing to companies like Sunrun and Clean Power Finance, which focus on that part of the business.

The advantage for RGS Energy is that financial statements are more straightforward. A project is completed and sold, there's not 20 years of wondering if customers will pay their lease or wondering what value will be generated when the lease is over (which is about 40% of SolarCity's retained value).

Execution will be key
While SolarCity and RGS Energy play in the same solar space, their recent trajectories have been very different as well. SolarCity has been growing by leaps and bounds, taking market share in the process. RGS Energy has been losing share and has been losing money despite selling systems.

The good news is that management expects to be EBITDA positive for the fourth quarter and growth is picking up with 10.7 MW installed in Q3 versus 10.3 MW in the first half of the year. The acquisitions of Mercury Solar and Syndicated Solar also will kick up growth.

The concern is that cash flow won't be high enough to fund operations unless margins pick up quickly. Q3 ended with just $2.3 million in cash on hand and a $20 million share offering was required to keep the company afloat. More dilution will be in store unless management can execute on its growth and profit plans.

To be a good investment, RGS Energy must execute flawlessly because competition in solar is just heating up. The good news is that if it can execute the upside is tremendous considering the small market cap. 

Foolish bottom line
I'll say that I'm intrigued by the opportunity RGS Energy has ahead of it. Right now it's a speculative stock and I'd like to see a solid profit before buying shares. But if the company can continue to grow and expand the value generated in each installation it has the possibility to be a huge winner.

The solar industry is only going to grow so the macro picture is good and the Northeastern U.S. where RGS Energy has a significant market share is still a fragmented market. Keep an eye on this stock and check back to Fool.com for more solar analysis.