SolarCity (NASDAQ:SCTY.DL) is no longer alone in the residential solar market and its closest competitor is clipping at its heels. Vivint Solar's (NYSE:VSLR) fourth-quarter earnings report showed that there may not be as much difference between the country's largest residential solar company and its smaller rival as you think.
Vivint's costs are similar to SolarCity's, its growth is faster, and in the future it may be a safer bet for investors.
SolarCity gets a real rival
Vivint Solar's roots are from the home security company Vivint, but it really only began building solar systems about three years ago. That's when its former parent saw that it had the ability to sell solar door-to-door in the same way they were selling security systems. The business exploded. From 2011 to 2014, Vivint went from upstart to a 16% share in the residential solar market.
As you can see above, Vivint Solar grew installations 191% in the fourth quarter and also increased bookings 150% to 52 MW. To put this growth in some perspective, SolarCity grew installations 78% in 2013 and 79% in 2014 to 502 MW, so Vivint Solar is out-growing its rival, albeit from a smaller base.
Surprisingly, it's doing this growth primarily on the east cost, and not the traditional solar market in the U.S. southwest. Sixty-two percent of Vivint Solar's installations in the fourth quarter were in the eastern part of the country, which actually hampers costs because weather tends to get in the way.
On the cost front, Vivint Solar has been nearly as impressive as SolarCity. You can see below that Vivint Solar's cost chart shows a rapid decline in costs and is nearly matching SolarCity.
In three quarters, Vivint has cut costs 30%. This compares to SolarCity cutting costs 22% from 2013's average to Q4 2014.
Of course, that doesn't tell the whole story for either company. Vivint Solar experiences higher costs per watt in the snowy winter months, which is one reason why Q1 costs are so much higher than Q4. SolarCity has the advantage of including low cost commercial systems in its cost per watt figure (which I'll cover in a moment). But you can see that the Q4 2014 comparison between the two shows only a small cost difference.
For 2015, even including seasonality, Vivint Solar expects its cost per watt to be $2.80 to $2.90 and by 2017 it hopes to hit $2.50 per watt, the same goal as SolarCity.
Commercial impacts on solar
One difference between Vivint Solar and SolarCity is that Vivint Solar has been focused entirely on the residential solar market and SolarCity has added commercial projects. In the charts above, this can skew costs higher because a commercial system is much cheaper to install on a per watt basis. SolarCity is targeting about 20% of its business as commercial solar and its Q4 commercial booking mix was even higher than that. Now, Vivint Solar is throwing its hat in the commercial solar ring as well.
On the fourth-quarter conference call, Vivint's management said they would enter the commercial market and use third party installers to put up projects. In essence, Vivint will act as a financier and use its scale to buy equipment, but won't put much labor into the projects.
What's impressive is that this is an additive market for Vivint Solar. When Vivint says that it's expecting to grow to 290 MW-310 MW (87%-100% growth) in 2015 it's only including residential solar. So, it's likely Vivint Solar will more than double its installations in 2015 when you include the commercial business.
If you like SolarCity, you should love Vivint Solar
Consider that before Vivint Solar's stock exploded today the company was worth about $900 million compared to $5.0 billion for SolarCity.
Based on 2015 estimates Vivint is about a third of the size of SolarCity, generates about the same amount of value per watt, but it's growing faster and it was a fifth of the cost of SolarCity's shares. If you love SolarCity, you should love Vivint Solar, even after today's pop.
Long term, I have similar questions for Vivint Solar as I have for SolarCity, but just on a valuation basis I think Vivint is a much more attractive stock. Vivint has proven the ability to cut costs and obtain customers with the best in the business. That makes it a threat to even SolarCity's market share, especially now that it's moving onto SolarCity's home turf of California.