SolarCity (SCTY.DL) has grown almost unencumbered in the U.S. residential solar market. In many places its biggest competition is a small installer who is reliant on a third party for panels, financing, racking, and a slew of other products.
But SolarCity's success is sure to bring out competitors who want to grab a piece of this booming solar market.
The competitive landscape
SolarCity has built a massive 36% market share in U.S. residential solar and it has a higher share than the next 50 competitors combined. But there are a few companies looming on the horizon looking to grow in the market.
NRG Energy (NRG 3.30%) recently bought a residential solar installer and with a multi-billion dollar balance sheet it could easily become a top-five player in the residential market (it's already one of the top in utility scale solar).
SunPower (SPWR -5.58%) installed 38 MW of residential solar in the third quarter through its partner channel. SunPower's strategy is a little different than SolarCity's but with a higher efficiency panel it's a company worth watching in this space.
But the company SolarCity should watch closely is Vivint Solar (VSLR), who installed 49 MW of solar in the third quarter, up 196% from a year ago. This compares to 137 MW of solar deployed by SolarCity, up 77% from a year ago.
If you look at the installation growth of SolarCity and Vivint Solar in the chart below you can see that Vivint was 22% the size of SolarCity in Q1 2013 and today its grown to 36% of its size. If this continues much longer, Vivint Solar and SolarCity may be installing the same amount of solar every year.
Source: Company earnings releases.
SolarCity's cost lead is shrinking
Vivint Solar is still a very young company, just over two years old, but it's done a lot to cut costs and grow competitiveness in the solar market. You can see below that it wasn't all that competitive with SolarCity's cost structure to start the year, but now its $3.12 per watt cost, including SG&A, is just $0.22 over where SolarCity is.
Source: Company earnings releases.
It's also worth noting that Vivint Solar's retained value last quarter was $1.82 per watt, higher than SolarCity's $1.79 per watt. A lot goes into retained value but at the least we can assume that they're generating about the same value for each watt installed.
Why Vivint Solar is a huge threat
SolarCity has grown recently in part because of a push into new markets on the east coast, like New York. This is Vivint Solar's home territory so it's not going to grow unencumbered there.
At the same time, Vivint Solar is expanding on the west coast in Arizona and California, where it has incredible upside potential if it can compete with SolarCity. In short, competition is increasing.
While the solar market may not be over saturated on a national level there are regions of the country where a high percentage of customers have already gone solar. It's here where SolarCity and Vivint may eventually need to compete based on price. Now throw NRG Energy and SunPower in the mix and you could see margins fall for a number of installers in the industry.
Why Vivint Solar stock is better than SolarCity
I highlighted above that Vivint installed about 36% as many MW of solar as SolarCity last quarter and generated a slightly higher retained value per watt, plus it's growing faster. On a relative basis, it would then seem logical Vivint Solar would have a market cap around 36% the size of SolarCity and possibly higher if you consider growth potential.
In reality, Vivint Solar's market cap is about 26% of Solarcity's at $1.2 billion. Investors are getting a discount in a high growth company in the same market as SolarCity and I think it's just because Elon Musk's name is attached to SolarCity.
If I were buying a residential solar installer today I would pick Vivint Solar based on performance and valuation alone. It has a potential equal to that of SolarCity but it's trading at a huge discount for investors looking to get into this high growth market.
