There isn't a lot of differentiation between most solar installers operating in the market today. A system installed by Vivint Solar (VSLR) will likely use a lot of the same equipment and technology as a system from Sunrun (RUN 7.05%), and it will produce a similar amount of energy over its lifetime.
Companies are really competing with different sales models and pricing strategies to differentiate themselves in the market. For Sunrun, that means using a combination of channel partners and self-installed solar systems, primarily sold through a leasing or power purchase agreement model, known as third-party financing. Vivint Solar was built with third-party financing, but it's also added cash or loan sales to its portfolio.
For investors, the difference between installers comes down to growth and value on the balance sheet. And that's where I think investors are getting the current valuation of Vivint and Sunrun wrong.
Growth goes to Vivint Solar
In the third quarter, Vivint Solar installed 54.3 megawatts (MW) of solar systems, up 17% versus a year ago. Sunrun installed 99.8 MW of solar, up 11% from a year ago, meaning Vivint Solar is currently growing faster.
On the surface, the fact that Sunrun installed nearly twice as much solar may imply that it should be far more valuable overall. But this is where the value of each watt installed matters for investors. Size doesn't always win in solar.
How to measure value in solar energy
Sunrun sells off most of its contracted cash flows to investors, aiming to be near-term cash flow positive. But it also implies a lot of long-term value by making very generous assumptions about the renewal value of a solar system, despite the fact that there's little, if any, evidence customers will renew a lease on 20-year-old solar equipment.
I think the conservative way to value companies is put a zero value on the renewal of a solar lease, only valuing what's under contract. If we do that using retained value (Vivint) or gross earning assets (Sunrun), which are comparable measures, you see that Vivint Solar's stock looks like a much better value.
|Company||Net Retained Value (Contracted)||Shares Outstanding||Contracted Retained Value per Share||Share Price|
|Vivint Solar||$516.2 million||119.3 million||$4.33||$5.86|
|Sunrun||$472 million||120.4 million||$3.92||$12.79|
The upside for Sunrun is that it's generating more upfront cash than Vivint Solar, keeping cash flows further in the future. But if contracts live up to plan, Vivint Solar should generate more value for shareholders.
Another reason Vivint Solar is better-positioned long term is that it has lower costs. Sunrun's creation cost for solar systems is $3.34 per watt, compared to $3.06 per share for Vivint Solar.
Lower costs will ultimately allow Vivint Solar to charge lower prices for customers and expand its market to more geographic areas. Given the fact that neither company has a technology advantage, cost is key.
The better buy today
Sunrun may be the biggest residential solar company in the U.S. today, but that doesn't make it the best value. Vivint Solar has more value on the balance sheet, faster growth, and lower costs. It's the clear winner between these two stocks.