Shares of Vivint Solar Inc (NYSE:VSLR) jumped a whopping 82.8% in June, according to data provided by S&P Global Market Intelligence, as investors piled into solar stocks. But the future may not be as bright as the stock's move indicated.
The biggest single move in Vivint's stock was a jump on June 20 that was driven by an analyst upgrade. Goldman Sachs analyst Brian Lee upgraded the stock to a buy rating and put a $6 price target on it, which is nearly where it ended the month.
It's no coincidence that $6 was the price target, given that Vivint Solar says it has $5.90 per share in net retained value already on the balance sheet. And if it unlocked that value, it could create more value for shareholders.
There's no doubt Vivint Solar has a value on its balance sheet, but estimating how much is difficult. The $5.90 per share value management uses to estimate value includes a low discount rate of 6%, a renewal assumption that's being projected with no historical basis, and an assumption customers will pay rising bills for 20 years or more. If these predictions don't come true, the value estimates could fall apart.
The more immediate challenge could be rising solar-panel prices, which will put pressure on costs this summer. Vivint Solar's shares may have been undervalued in May, but after June's big bump I think a cautious approach would be prudent, until we learn how earnings looked in the second quarter.