Shares of Sunrun (NASDAQ:RUN) jumped 86.1% in July, according to data from S&P Global Market Intelligence, after agreeing to buy competitor Vivint Solar. Shares have continued to move higher in August, climbing 25.4% in the first full week of trading.
Sunrun is acquiring Vivint Solar in exchange for Sunrun stock at an exchange rate of 0.55 shares for each Vivint Solar share. The deal will combine the two biggest residential solar installers into one renewable energy giant.
Management sees about $90 million of cost synergies because of the deal, but that's not the real driver of the merger. Both Sunrun and Vivint Solar have had a hard time growing as the cost to acquire new customers has risen over the past few years. In theory, a bigger company could reach more customers more efficiently and potentially charge a higher price for solar, but that's yet to be proven by any company with a nationwide scale.
The other opportunity to watch is virtual power plants, which Sunrun has been investing in heavily. As Sunrun installs more energy storage systems, it can combine them together into what's known as a virtual power plant and bid them into the competitive power markets. This could be another revenue stream for thousands of installations each year.
Historically, as residential solar companies have gotten bigger, they've struggled with rising costs, particularly for marketing. This happened to SolarCity, and Sunrun's sales and marketing costs have been rising since 2017 from $0.52 per watt to $0.77 per watt in 2019. Overall, Sunrun's installation costs are flat (excluding platform services) since 2017, but rising marketing costs are a concern, and if they don't get better after the merger, this deal may not add the value investors are hoping for.