Upcoming Solar IPO Could Give Investors Another Residential Solar Play

Image: SunPower

We now have definitive confirmation that Sunrun is preparing for an IPO. The company filed its initial S-1 registration statement with the SEC on June 25 and it gives us some detail into what could be one of the hottest solar IPOs in 2015.

Sunrun is a residential solar company, but it's unlike competitors in the industry like SolarCity (SCTY.DL), Vivint Solar (VSLR), and SunPower (SPWR -2.21%). Below, I'll walk through how this company is different from competitors and how they stack up against each other.

What you need to know about Sunrun's IPO
Sunrun isn't exactly the same company as SolarCity and Vivint Solar, who are vertically integrated residential solar installers who own the value chain outside of manufacturing solar panels (which SolarCity is getting into). Traditionally, it's been a middleman, providing financing, sales and quoting tools, and other services to installers who could choose a number of panel manufacturing partners.

That model changed a little when Sunrun acquired REC Solar's residential solar unit in 2014 to integrate into sales and installation as well. Now, it has a three-pronged approach: direct-to-customer, partner, and strategic partner channels.

When it comes to size, Sunrun is the second largest system financer in the U.S. behind SolarCity. But it hasn't grown nearly as quickly as Vivint Solar in recent years, who is down the second largest installer in the U.S. on an ongoing basis. SunPower isn't far behind Sunrun but it plays in the high end of the market and is currently capacity constrained.

Source: Company earnings releases and SEC filings

Sunrun's estimated retained value was $1.1 billion as of March 31, so depending what the market cap of the company is at IPO the stock could be an intriguing value. 

Image: SolarCity

The problem with being a financing company
While Sunrun has built a business out of providing services to solar installers, which has worked out well so far, it puts the company in a challenging position going forward. SolarCity and Vivint Solar have become one-stop shops for residents looking to go solar and they control the cost structure up and down the supply chain. Sunrun doesn't have that across its business and relies on partners to do most of their installing, much like SunPower does.

From a technology standpoint, Sunrun doesn't have any differentiation either. It buys off the shelf solar panels from REC Solar and other suppliers and uses traditional inverters as well. It even used racking from Zep Solar until SolarCity bought that company.

Differentiation in solar is key
We don't know all of the details about Sunrun's IPO and the price will matter, but the long-term success of the company may depend on how it differentiates itself from the competition. Companies big and small are targeting the booming residential solar market and unless you have a higher efficiency panel, larger sales force, lower cost structure, or another differentiator it will be tough to make money. Sunrun's $75.9 million in losses in 2014 and $18.0 million in losses in the first quarter show that.

No matter what, this is an IPO to watch because Sunrun is one of the bigger players in the solar space. Just be sure to watch what management does with the $100 million or more from a proposed offering. That may determine the company's fate more than what it's done in the past will.