Vivint Solar Inc (NYSE: VSLR) was once the fast-growing, younger rival to residential powerhouse SolarCity (NASDAQ: SCTY), both set on upending the energy industry as we knew it. As recently as a year ago,VSLR was posting growth rates of 100% annually, and there seemed to be no end in sight to its potential.
But reality soon hit the solar industry, and when its stock started to fall, Vivint Solar saw a way out when SunEdison agreed to buy the company for $2.2 billion. After nine months of turmoil, that deal is now in the past, and Vivint Solar is on its own again. Is the company ready to thrive as a private company, or does it have a troubled future ahead?
Taking their eye off the ball
One challenge for a company that's being acquired is keeping operations going smoothly until the acquisition goes through. Management is often focused on pushing forward with the acquisition, and in the case of a solar company, financing partners may not be eager to lend money to a company in corporate limbo.
That dynamic led Vivint Solar's installations to grow just 17% in the fourth quarter to 59 MW, and bookings were up 56% to 80 MW. For perspective, a year ago, the company's installations jumped 191% to 50 MW, and bookings were up 150% to 52 MW.
Vivint Solar may be digging out from under its recent challenges, as signaled by a new $200 million financing agreement. But the path to profits may be more difficult than imagined.
The $200 million in financing Vivint Solar just lined up is one of its first signs of trouble. It comes in two tranches, the first of which is $75 million and comes with an interest rate of LIBOR plus 5.5%. The second $125 million is available if needed, but it comes with an interest rate of LIBOR plus 8%.
If that sounds high, that's because it is. First Solar and SunPower are getting loans for LIBOR plus 2% to 3%. SolarCity's current term loan is LIBOR plus 3.25%. The fact that Vivint Solar is getting a rate 2% higher than competitors means it'll have less pricing power than competitors, and margins will shrink as a result.
The other underlying problem is that utilities are finding ways to fight solar on a national scale (see Nevada), and the easy customers have already gone solar, meaning acquisition costs are going up. This squeezes margins on the installations that are left, leaving solar companies with a choice between slower growth and lower margins. This is a rock and a hard place for a company like Vivint Solar.
What to watch at Vivint Solar
If Vivint Solar is going to be able to survive on its own, it's going to have to find a way to lower financing costs and increase margins. This may mean a move to selling solar systems with loans from third parties, or even selling leased systems to a company or fund that wants to own them long term.
With slowing growth and rising financing costs, I don't think the status quo is going to be good enough for Vivint Solar. And that's what's going to keep me out of the stock right now.