There are essentially three big residential solar companies investors can invest in right now, and that's about to go down to two. Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR) are combining to form a mega-residential solar installer, which will be a nearly $9 billion company. The third is SunPower (NASDAQ:SPWR), which has spent the last few years shedding its utility-scale solar business and yieldco, and spinning off its manufacturing operations this month, all to focus on residential and commercial solar development.
What investors need to consider today is where the most value will be created in the residential solar industry, and what value they're getting when they buy solar stocks. Choosing the best stock to invest in gets complicated.
Where everyone stands today
To lay out where we are today, I want to show what Sunrun, Vivint Solar, and SunPower are worth today. Keep in mind that this is before the merger of Sunrun and Vivint Solar, which is an all-stock deal, and SunPower's spinoff of Maxeon Solar Technologies, its manufacturing arm.
Clearly, SunPower is the least valuable of the three, but that's not because it's generating less value based on traditional value metrics.
You can see below that SunPower has generated more revenue than Sunrun and Vivint Solar combined in the past year, and is more profitable. These two metrics don't show the retained value any of these companies have from solar installations they own, but they're still useful metrics.
These figures aren't what these companies advertise as their value-creation metrics, so let's also look at how retained value looks for these three companies.
The value on the balance sheet
Retained value is the present value of all cash flows from residential solar projects. With power purchase agreements and leases, customers sign 20-year contracts to buy electricity from the installer, which pays for the installation itself.
The calculation usually includes an estimate of the value of renewal, which may or may not happen and often accounts for a large percentage of total calculated value. If we take Sunrun as an example, it projects $1.43 billion of net retained value (or earning assets), but only $369 million of that value is actually under contract.
You can see below that Sunrun and Vivint Solar hold far more retained value than SunPower, which holds its residential solar projects in a joint venture with Hannon Armstrong, which it owns 51% of.
|Sunrun||Vivint Solar||SunPower (51% ownership)|
|Gross Retained Value||$3.31 billion||$2.46 billion||$1.27 billion|
|Net Retained Value||$1.43 billion||$1.29 billion||$358 million|
|Net Contracted Retained Value||$369||$638 million||n/a|
What this doesn't account for is the fact that Sunrun and Vivint Solar intend to grow retained value long-term. SunPower, on the other hand, finances only about one-third of its solar installations, and sells the rest through loans or cash sales. Sales generate margin immediately, leading to some of the revenue and profit advantages for Sunpower that you see above.
Comparing the three companies, it really depends on how much you value the renewal of a solar installation 20 years in the future. If customers indeed renew their leases, Sunrun is going to be a great stock long-term. If customers don't renew or decide to buy solar installations in the future, SunPower is better positioned.
Where is the residential solar industry going?
Going forward, the Sunrun/Vivint Solar combo will be a traditional solar installer and finance company. Most of the company's employees are either in solar sales or installation, and it aims to grow assets under ownership long-term. Its value will be determined by its ability to lower costs, increase revenue per customer, and lower financing costs.
SunPower has gone with a different approach, working with dealers who do most of the heavy lifting in sales and installation. That should allow the company to keep assets light, focus on developing technology, and potentially reach a wider audience of customers globally. And its focus on more cash and loan sales could be an attractive financing option for homeowners, who would generate more value by owning their solar systems rather than leasing them. The problem SunPower has faced is that its high-efficiency solar panels are higher cost than those of competitors, so it hasn't generated the margins competitors have in the residential solar industry.
Theoretically, SunPower could have more upside than either Sunrun or Vivint Solar, but that hasn't played out for investors long-term, and it needs to start showing that cash and loan sales of solar can be profitable.
Consumers will decide the winner here
The future gains for residential solar investors will come down to what consumer preferences are in the future. If consumers choose third-party financing from installers and long-term contracts, it'll favor Sunrun in a big way. But the bigger savings are in buying a solar system with a low-cost loan and keeping the tax benefits for yourself. And I think ultimately that's what's going to win out.
My pick for the better long-term stock in solar is SunPower, but that hasn't been the winning pick in the past because customers have chosen Sunrun's financing. And maybe financing is indeed the most important thing in solar energy.