How SolarCity and SunPower Plan to Dominate Solar

SolarCity is putting thousands of workers like these to work installing solar on rooftops around the U.S. Image source: SolarCity.

The stage has been set for an incredible growth curve in the solar industry, and SolarCity (SCTY.DL) and SunPower (SPWR 5.85%) are among the companies leading the way. SolarCity is the country's dominant residential installer, with a 36% market share, while SunPower is the world's efficiency leader, with projects in almost every market.

These companies both present fantastic opportunities for shareholders, but they are going about growth in the solar industry very differently.

The strategy for solar domination
What's incredible in the solar industry is the sheer size of the potential market. Spending on electricity worldwide hit $2 trillion last year, and by 2035 that figure is expected to grow to $4 trillion. Yet solar energy accounts for less than 1% of total electricity generation both in the U.S. and worldwide.

It's with that backdrop that SolarCity and SunPower have set lofty growth goals. You can see below that SolarCity plans to nearly double its installations next year, and its goal of reaching 1 million customers by 2018 indicates an annual run rate of 2 gigawatts of installations by that time. SunPower recently announced plans to triple capacity to 3,900 megawatts by 2019, a big investment in growth, particularly in the utility market.

Source: Company earnings releases and presentations.

The companies expect to grow quickly, but their strategies are very different.

How two solar powers will play the game

SolarCity aims to reach every home in the country, making solar accessible through leases and loans the common consumer can understand.

SunPower's bread and butter is large utility-scale solar projects like this one. Image source: SunPower.

SunPower is the high-technology company, selling a higher-priced product that could lead to a lower overall cost of energy over 20 or 30 years. It is also a diversified company, serving every segment in international markets. It won't be the biggest player in any given market, but it aims to reach the high end of the best solar markets in the world, whether they're residential, commercial, or utility-scale installations.

These two companies only go head-to-head in the U.S. residential and commercial markets, and even there they target different customers. SunPower is going after sophisticated buyers who are looking for aesthetics, efficiency, and quality and are willing to pay up for the SunPower brand. SolarCity is pursuing any and everyone willing to go solar; it will knock on doors, cold call potential leads, and even set up booths in Home Depot to spread the word about solar.

SunPower Chief Marketing Officer Erin Nelson explained the difference to me as being analogous to the PC strategies of Apple and Dell in the late 1990s and early 2000s. Dell was trying to reach everyone while Apple was content serving its rabid fan base with a high-quality, high-margin product. Both were successful.

How to play this burgeoning market
If you're new to investing in solar stocks or are looking to add some to your portfolio, SolarCity and SunPower should be at the top of your list. In a diversified portfolio, I'd look at these two as a basket and buy both stocks rather than betting on just one.

I think SunPower carries lower risk than SolarCity long-term, but it will also likely grow more slowly, especially in the next two years. Balancing the two in your portfolio will provide access to both high profits, in the case of SunPower, and near-term installation growth, in the case of SolarCity.

There's plenty of room for both companies in the solar industry, and their different business strategies means there's also room for both in your portfolio as they expand into this multi-trillion dollar market over the next decade.