Image source: SunPower.

It may not be the worst IPO a company has ever had, but Sunrun (NASDAQ:RUN) is definitely off to a bad start on public markets. The stock was sold for an IPO price of $14 per share, but as of the close of trading on Friday, it was down to $10.14, and there's no sign of a turnaround at the moment.

There are some structural challenges for Sunrun, but part of the market's reaction is a realization that there's a lot more upheaval in the solar industry than you might think.

Mr. Market has fallen out of love with residential solar
One general trend is that investors haven't been huge fans of residential solar in the past year or so. SolarCity (NASDAQ:SCTY.DL) and Vivint Solar (NYSE:VSLR) have underperformed the market dramatically, and it seems that continued losses, higher interest rates, and low energy prices are all putting pressure on the industry.

VSLR Chart

VSLR data by YCharts.

As I pointed out in my pre-IPO article, Sunrun faces many of the same financial challenges as competitors, so it's no surprise the company would be under market pressure. What is surprising is that the stock was sold at such a high price at IPO and public investors haven't been as eager to buy now that shares are on the market. Usually investment bankers try to underprice IPOs so they look more "successful" to the market and early IPO investors. 

SolarCity has more workers on the ground and a more vertically integrated supply chain than Sunrun. Image source: SolarCity.

Structural challenges Sunrun faces
The market's whims aren't a big concern to me or long-term investors, but Sunrun's flaws are. It's becoming increasingly clear that vertical integration and technology differentiation are two key factors for solar companies, and Sunrun has little of either.

Until it bought REC Solar's residential business, Sunrun was a finance and technology company supplying services to its fleet of contract installers. It was essentially a way to get financing when financing was tough to come by for residential solar. But today's large installers like Vivint Solar, SolarCity, NRG Energy (NYSE:NRG), and SunPower (NASDAQ:SPWR) can generate their own financing, so Sunrun's services weren't needed. That's why the acquisition of REC Solar was so important.

The next challenge that faces Sunrun -- as well as Vivint Solar, NRG Energy, and SolarCity -- is technology. Most residential solar companies are selling essentially the same solar panels, inverters, and financing structures, meaning that eventually, they'll be competing on price, which they don't want to do. Technology could allow companies to differentiate themselves, and it's one reason SunPower has remained profitable while residential competitors are losing money quarter after quarter. It's also why SolarCity bought solar panel manufacturer Silevo and is building a high-efficiency manufacturing plant in Buffalo, New York.

Sunrun doesn't have any technology advantage, and that's a weakness as competitors develop plans to differentiate. Maybe investors are recognizing this weakness and are waiting to see how the company performs over the next year or two before jumping in.

What's next for Sunrun?
We don't know yet what will happen with Sunrun, but if the current market trends continue, the company might be best off selling itself to a competitor like NRG Energy.

A falling stock price makes it harder for a company to use stock to buy components needed for building a vertically integrated business, something SolarCity did very aggressively. And mounting losses will eventually mean more debt or a share sale are needed, which shareholders don't like.

After only three full days on the market, Sunrun looks like it's stuck between a rock and a hard place, with very few options for getting out.