Most experts expected the implementation of tariffs in the U.S. would push solar prices up and send demand way down. But a surprise move in China has sent panel prices down sharply, boosting demand, and helping solar installers finish the year with a lot of momentum.
A full transcript follows the video.
This video was recorded on Dec. 20, 2018.
Nick Sciple: What are you thinking about this space with the installers this year?
Jason Hall: It's been surprisingly good, it really has. I'll tell you, a year ago, I was pretty negative on companies like Sunrun, Vivint Solar. Those are the two largest pure play publicly traded solar installers. I was pretty negative on them because of the looming tariffs and how that was likely to impact demand domestically. But, I'll tell you, especially for Vivint, it's been a good year. I think stock is still up something like double over the past year, which is really good. The company's also built up a pretty good book of recurring revenues that it's going to own.
I'll talk really quickly about how these companies work and how they make a living. Essentially, they do two things. They sell you a solar system and install it, and they make a profit on that sale. Then, they can make recurring income over time for maintenance and support that thing. The other way that they make money is, if you don't want to buy or finance, take out a loan, to acquire a solar system, there are solar leases and there are PPAs, or power purchase agreements. These are long-term like 20, 25-year contracts. What happens with these is, the solar installer maintains ownership generally. Sometimes they sell it to a third party, but generally, they maintain ownership of that asset and it goes on their books. Then, they have a source of recurring revenue that they can make a living from over time.
I think Vivint Solar has something like $8.10 per share on its books in present value of the long-term contracts that it holds. The benefit for you as a consumer of doing one of these PPAs or lease agreements is that you get a fixed payment based on whatever your usage is going to be. And generally, you can reduce vs. your energy bill because your energy bill basically goes away. You may pay a little bit to your electric utility, but you can save 20-30% off of what you would normally pay your utility. You don't have to make a major financial outlay or take out a loan to buy the solar system. And you know that the installer is going to take care of maintenance and repairs and keeping the system up and working.
The benefit for them is, typically, these can be a little more profitable for them than just selling you a system. That's part of the trade, too. They can make a little bit more money on these deals, and they can capture recurring cash flows for the length of that contract.
As an investor, if you're looking at these businesses, you want to understand, what is their mix of business? Can they sell systems profitably? And can they profitably do these solar leases and PPA agreements? Especially as interest rates are going up, that's going to put a little bit of a squeeze on them to continue making the same margins. They have to get money to pay for those systems still, and it's typically debt that they take out. You have to understand that.