SolarCity (SCTY.DL) has built such a dominant position in residential solar that competitors have been forced to follow the company's lead, acquiring competitors and partners to keep up. The announcement last week that Sunrun was buying the fourth largest residential solar installer, REC Solar, and the racking company SnapNrack is the latest evidence that companies are just copying what has made SolarCity successful.
What's different about this acquisition is that it takes a leading finance company into the sales and installation market, building another sizable competitor for SolarCity. As competitors get stronger, the sales growth SolarCity has generated
so easily over the past few years may be harder to come by and margins could even come down as companies compete on price.
Why are companies following SolarCity?
The reason Sunrun and others have followed SolarCity's model is because it works. What SolarCity has done is create the innovative business processes that the solar industry needed to grow the residential market. It brought the solar lease to the masses, created multiple sales channels with scale, introduced securitization, and even brought a standardized racking design under its wing when it bought Zep Solar. The innovation and scale helped the company nearly double market share over the past year.
60 MW (up 151% y/y)
The long-term challenge is that very little of what SolarCity does is protected from competition. There aren't patents keeping competitors from offering leases, there's no trademark on securitization, and SolarCity's brand only holds so much weight when the cost of solar electricity is what consumers will be making decisions on.
We've already seen No. 2 residential installer Vivint vertically integrate, and after offering its first commercial lease on its own RGS Energy (NASDAQ: RSOL) we can see the fifth largest residential solar installer slowly integrating vertically. I wouldn't even be shocked to see SunPower (SPWR 0.63%) reexamine working with hundreds of dealers around the country and pull some of them under its wing. If it does, SunPower alone could be the second or third largest residential solar installer almost overnight.
Can competitors take share from SolarCity?
Copying SolarCity's business plan is one thing, but market share is what really matters. That's what will be key to watch in 2014 and beyond because as you can see from the table above, a lot of SolarCity's growth was due to gaining market share. Even if it just maintains its current share the company will need to see the entire industry grow quickly to live up to its valuation.
The real danger of competition
Market share is a concern, but margins may be even more important to SolarCity's value. The company increased retained value per watt to $1.37 last quarter and new residential sales are generating around $2 per watt. One of the ways these new competitors will try to gain customers is by offering more attractive pricing on solar systems, lowering margins.
From a customer perspective, there's probably not a big difference between choosing SolarCity, Vivint, Sunrun, or RGS Energy for a solar system. None of them make their own panels and you can get similar quality and efficiency from each company, even using the exact same components. That means they'll be competing on price and customer service.
Operationally, I don't think SolarCity will have of a cost advantage either. It led the way into securitization but Sunrun's co-founder Ed Fenster told me last year that they would let SolarCity lead the way in financing, choosing to follow once investors were offering better terms. Now that there are four players with some scale there's few offerings one company can make that another can't follow.
What to look for at SolarCity now
It's not as if SolarCity is in trouble, but competition got a lot stronger over the past six months. They'll have to work harder to grow market share and may even have to begin offering lower prices to compete.
For investors, the challenge is that the market is pricing massive growth for SolarCity for years to come. Meeting those expectations just got a lot more challenging.