If Vivint Solar Inc. (NYSE:VSLR) is generating as much value as it says it is, the best idea might be to shut down all non-essential operations and just collect revenue from its existing contracts for the next two years. That sounds harsh, but a company with a market cap of $389 million, $323.7 million in net debt, contracted revenue of $1.87 billion, and retained value of $906 million is certainly undervalued by the market. Right?
Maybe it's not that simple.
Vivint Solar's disappointing fourth quarter
The high-level numbers aren't necessarily concerning for Vivint Solar on the surface. Revenue was up 134% to $16.0 million in the fourth quarter of 2015 and net loss more than doubled to $13.2 million. Losses are common in growing renewable energy companies, especially when leasing is their main business model, so no alarm there.
What was crushing were rising costs and slowing growth, two terrible signs in the rooftop solar industry. Megawatts installed increased just 17% from a year ago to 59 MW and costs per watt were $3.12, up from $2.96 a year ago.
When you're in a highly competitive market with companies like SolarCity (NASDAQ:SCTY.DL), rising costs aren't a good sign. SolarCity refocused on costs late in 2015 and in the fourth quarter, costs were down $0.15 per watt from a year ago to $2.71. While from a cost perspective Vivint Solar was nearly on level footing with SolarCity in late 2014, now it's now falling behind.
The saving grace is that Vivint Solar has an estimated $906.1 million in retained value, an estimate of the present value of future cash flows. And $705.6 million of that is under contract. Theoretically, if Vivint Solar were to sell residential solar assets or even shut down sales operations and just collect those contracted cash flows, it could create value for shareholders. But that isn't likely to happen.
Taking the eye off the ball?
The easy explanation for Vivint Solar's slow growth and undisciplined costs is that it's been in the midst of being acquired by SunEdison. That agreement fell apart early in March, but in 2015, management must have been spending much of its time working on the acquisition and operations suffered as a result.
Where does Vivint Solar go from here?
The questions now are about Vivint Solar's future. It spent $295.3 million on operations in 2015 and added just $322.5 million in contracted retained value. That's not a compelling value-add for a company in the solar industry. And with SolarCity already at a lower cost and smaller, local installers gaining market share, it should look for alternative strategies.
There are two that Vivint Solar could pursue to stay alive. The first is that it could simply sell solar contracts as they're signed, probably to a yieldco or dedicated renewable energy fund. Blackrock, which is a major shareholder of Vivint Solar, would be a natural buyer of these assets.
Long term, I think a major shift needs to happen with Vivint Solar turning more to selling solar systems for cash or providing loans. This would take the long-term uncertainty off the leasing model and bring in cash flow immediately. No more messing around with concepts like retained value. Put the financial risk on loan providers, which is what they do for a living.
Until structural changes take place and costs are reduced dramatically, Vivint Solar is in a tough position in the solar industry. As an investor, I wouldn't be betting on it for a quick recovery.