Vivint Solar’s Changing (and Shrinking) Solar Business

The marketplace seems to be happy with Vivint Solar‘s (NYSE:VSLR) fourth-quarter 2016 results, and in a few ways, a association is creation progress. Revenue was adult 161% from a year ago to $41.8 million, and non-GAAP net detriment per share softened $0.09 to $0.41 per share. 

Beneath a title numbers, though, there are a few concerns investors should be disturbed about. There are also some opportunities — if a business can adjust to a new realities of residential solar. 

Solar panels on a residential rooftop in daylight.

Image source: Getty Images.

Where a solar marketplace is headed

Vivint Solar’s solar business is focused on offered solar systems by leases and appetite squeeze agreements, that are long-term contracts that business pointer to buy appetite from solar systems on their roofs. The plan has been successful for years, though Vivint Solar owns a solar panels and needs to financial their construction. 

What altered in 2016 is that a residential solar marketplace moved divided from leases to money and loan sales. According to GTM Research, leases appearance in marketplace share during 72% in 2014, though they fell to 47% marketplace share in Q4 2016. It’s by that lens we should demeanour during a residential solar market. 

What Vivint Solar reported

Installations final entertain fell from 59 MW to 47 MW, many of that were leases. In other words, a association shrank and mislaid marketplace share. 

The other trend was costs relocating aloft in a quarter. Costs per watt were $3.08, adult from $2.85 a entertain ago, though down $0.04 from a year ago. Costs were revoke than Sunrun‘s (NASDAQ:RUN) $3.41 per watt, though it’s concerning that they’re on a rise. Management does design costs to tumble to between $2.95 and $3.05 per watt in a initial entertain and full-year costs of $2.82 to $2.94 per watt. 

The defended value figure, that is an estimation of long-term value combined in leases, faces a few some-more challenges. Below, I’ve highlighted defended value reduction debt as reported, and defended value if we assume an 8% bonus rate and no renovation value. This composition is value deliberation since we’ve seen a rate of lapse that debt and equity investors direct in a marketplace rise, and there’s unequivocally no justification to infer business will replenish a franchise on 20-year-old solar panels. 

Data source: Vivint Solar. Calculations by a author. 

The $543 million defended value figure could potentially uncover a deeply ignored stock, trade with a marketplace top of only over $300 million before earnings. But if we change a bonus rate to 8%, that I would disagree is some-more suitable than 6%, and don’t assume renewal, a value combined roughly evaporates. 

Signs of a brighter future

I would disagree that leases are lagging in profitability, and when we cruise that a marketplace is relocating divided from a franchise financing model, that’s problematic. But Vivint Solar is starting to reinstate leases with money sales and loans, that is going really good right now. Gross domain on $16.5 million in complement and product sales was 23.5%, compared to 16.3% during Sunrun in a fourth quarter. Lower costs should assistance Vivint Solar beget aloft margins and/or yield revoke prices to business to win business. 

Look for a association to transition some-more and some-more of a business to money and loan sales over time. If that happens, it will move in evident money and revoke a risk of long-term financial financing that leases need. That would be a certain for a company’s operations prolonged term. 

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