The residential solar industry has been through a lot of ups and downs in the past few years. SolarCity was the top solar company in 2014 before running into rising costs, falling installations, and now a rapidly deteriorating business after it was acquired by Tesla. Vivint Solar (NYSE:VSLR) had its own acquisition drama, agreeing to be bought by SunEdison only to see the deal fall through and SunEdison eventually go bankrupt. Sunrun (NASDAQ:RUN) has taken over the mantle of the largest residential solar installer in the U.S., but recently released second-quarter results showed rising costs and struggling value creation for solar installations. The common thread here is that residential solar installers don't have much of a long-term competitive advantage and they each seem to stumble eventually.

One company that's bucking the trend with a product and strategy that could build a long-term competitive advantage is SunPower (NASDAQ:SPWR). Instead of installing solar panels itself, the company makes high-efficiency solar panels and sells them through dealers in the U.S. and around the world. It leverages its efficiency to command a premium price for solar panels and other services. By the look of recent results, it's gaining traction as others are struggling in the solar market.

A home with solar panels on the roof and two people sitting under a covered patio.

Image source: SunPower.

SunPower's improving distributed solar business

SunPower has managed to grow its residential solar business even as others have struggled. Second-quarter 2018 residential solar revenue was up 31.7% to $205 million and gross margin expanded 150 basis points to 21.8%. Results will gyrate quarter to quarter, but SunPower is clearly growing in the segment and maintaining strong margins. The results are impressive at a time when tariffs have increased costs for most installers and marketing costs are eating into margins. 

The reason SunPower hasn't been as impacted as others by tariffs or rising marketing costs is that it's a premium supplier and isn't as affected by cost changes in the marketplace. Customers choosing SunPower's solar panels aren't doing so because they're the cheapest option, they're choosing them because they will maximize solar energy production per square foot of roof space. That's a durable advantage in this volatile environment.

Technology could solidify SunPower's advantage

The success of SunPower's residential solar business has caused the company to focus more research on residential solar products, rather than large-scale solar farms. Its next iteration in technology is being called simply Next-Generation Technology, or NGT, solar panels, which will be over 23% efficient in turning the sun's energy into electricity and have a cost similar to commodity technology, which is 17% to 19% efficiency.

Higher efficiencies will allow SunPower to maintain premium prices, and if costs come in as planned, then margins may expand even further. On top of margin expansion, NGT is more efficient in manufacturing, allowing 800 megawatts (MW) of current capacity to be upgraded to at least 1,200 MW of NGT capacity. That should help drive revenue growth long term.

The other piece that could help SunPower is energy storage. SunPower has launched a commercial energy storage product and is incorporating it into 35% of projects today. Residential energy storage is in its early stages, but it could be another incremental revenue source for SunPower.

Why SunPower is set to succeed in residential solar

SunPower's high-efficiency solar panels are gaining traction and margins are going up as some competitors are struggling in solar. The NGT solar panel that's expected to enter volume production next year could add to that momentum and improve financial results. That's why SunPower is set to succeed in residential solar and it's critical for the company long-term.

SunPower is shutting down its large-scale project development business, which accounted for 54.8% of revenue as recently as 2016 because margins were barely break even. Instead, the company is betting on growth in residential and solar, which is now nearly half of the business and growing. If these trends continue, SunPower may finally return to profitability in the next few years.  

Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.