The solar power industry has never been in as strong a position as it is at the start of 2020. Whether it's being generated by a rooftop system or a utility-scale power plant, solar energy is now cost-competitive with fossil fuels in most of the country, and has a bright future around the world.
I think the residential solar industry will have another record year in 2020 as solar becomes cost-effective for even more U.S. consumers. And that's why my top solar energy stocks to buy right now -- Vivint Solar (NYSE:VSLR), SolarEdge Technologies (NASDAQ:SEDG), and SunPower (NASDAQ:SPWR) -- are all big players in that segment of the industry.
Vivint Solar is the second-largest solar installer in the U.S. and it's generating value now in a way that will keep paying off for decades. When the company installs solar panels on a home, it normally takes on the financing, foregoing upfront payments in exchange for a 20-year contract to sell electricity to the property owner -- what's known as a power purchase agreement (PPA). It then sells tax benefits and cash flows to investors through debt financing that's backed by those contracts. What remains is "retained value" to the installer and shareholders.
As of the end of the third quarter of 2019, Vivint Solar had $1.6 billion of contracted retained value and $700 million of retained value net of debt.
Low interest rates should provide a big tailwind for Vivint Solar in 2020, as they mean future cash flows can be financed at lower rates, leaving more value flowing to the company and shareholders. Not only is solar energy making more sense financially for consumers across the country, financing is getting easier for big installers like Vivint Solar.
The solar panels that turn the sun's rays into electricity have become fairly commoditized over the past decade; these days, power optimizers and inverters are the component areas where the most value is being created.
SolarEdge Technologies has consistently been able to grow and make a profit in the solar industry. It started as a supplier of power optimizers, which maximize the direct current (DC) power coming from solar panels, and has since moved into everything from inverters (which convert DC current to AC current) and even energy storage.
For small installers, SolarEdge is a platform they rely on to monitor their installations' performance, and also to provide monitoring devices that its customers can view. Unless companies in this industry start to vertically integrate again (and that's a model they've been moving away from), I don't see how SolarEdge won't continue to gain market share.
The technology company
Finally, SunPower is spinning off most of its manufacturing business in order to focus on providing residential and commercial solar developers with an out-of-the-box solution. It'll have exclusive rights to the solar panels made by its former manufacturing arm -- soon to be the new Maxeon Solar Technologies -- and will provide those high-efficiency panels along with a quoting platform and sales leads, racking, inverters, energy storage, and a monitoring platform, to installers.
What SunPower hopes to do is lower installation costs by working with local installers rather than owning an installation network as Vivint Solar does. Those local installers can then leverage SunPower's superior technology and financing in their sales channels, getting some of the benefits of its scale.
SunPower isn't profitable and the Maxeon spinoff isn't complete yet, but long term, I think using local installers will be the most cost-effective way for people to go solar. And that'll put SunPower a step ahead of the competition.
Residential solar will be hot in 2020
Across the country, residential solar is growing as the barriers to access put up by utilities come down; installations are becoming more cost-effective every year. That'll help keep the industry growing, and Vivint Solar, SolarEdge, and SunPower have a lot of room to benefit from that in 2020.