While solar power keeps increasing, profits from it do not.
Falling costs also mean falling prices, which impact business models. Demand doesn’t always rise as fast as margins compress. Investors find gains difficult. This has been the case for a decade now.
So there was a huge sigh of relief when Sunrun (NASDAQ:RUN), the leading residential solar company, recently said it would buy Vivint Solar (NYSE:VSLR) for $3.2 billion in stock. The sighs were deepest at The Blackstone Group (NYSE:BX), Vivint’s largest shareholder.
The resulting company should have close to $2 billion in revenue for all of 2020 and be able to cut expenses by as much as $90 million. Whether there will be profits, however, remains to be seen.
The Rivals Have Different Approaches
Sunrun and Vivint have taken different approaches to the market.
Sunrun is based in California. It focuses on storage and can connect customer systems into “mini-grids” that are resilient when utility power goes out. Vivint is based in Utah and focuses on door-to-door sales, with many of its systems leased.
Both companies have been selling investment tax credits that are expiring, however. A Joe Biden presidency, with a Democratic Congress, could renew incentives in federal climate change policy. President Donald Trump and the Republicans won’t.
Sunrun’s deals tend to be corporate. In one deal, it signed three partners in the San Francisco Bay Area to link customer systems and protect against blackouts. In another, it signed a deal with Korea’s SK Group to electrify homes there and conduct research.
Vivint, meanwhile, closed on $300 million in tax equity financing for its customers during the quarter. It offers loans, sales and power purchase agreements through its sales force.
What About the Pandemic?
While waiting to see how the long term plays out, both Vivint and Sunrun are being hit in the short run by the novel coronavirus, which is collapsing the economy.
Second-quarter results for both companies disappointed optimists. Vivint lost $87 million on revenues of $306 million, up about 9% from a year earlier. Sunrun lost $13.5 million on revenue of $181 million, down about 9%.
The Sunrun loss was a surprise. Analysts had been expecting a profit. Shares dropped about 10%, but they’re still up over 200% on the year.
What About Tesla?
The third big player in U.S. residential solar is Tesla (NASDAQ:TSLA). It has been quiet since entering the market by acquiring SolarCity a few years ago.
Tesla has been focused on perfecting its Solar Roof product, which replaces roof tiles. Vivint and Sunrun, by contrast, install solar panels on existing roofs. Tesla CEO Elon Musk prefers a “one-click” approach to sales, in contrast to the longer sales and contracting processes of Vivint and Sunrun.
Once Tesla is ready to go, it could dramatically reshape the market, much as Dell (NYSE:DELL) reshaped the PC market in the 1990s with its direct sales model. But Tesla has become the market’s hidden leader. How? Solar has become immaterial to the company’s results, so it never steps on the market stage.
The Bottom Line on RUN Stock
News of the Sunrun-Vivint merger has given both stocks a ride. But future results are uncertain.
Buying RUN stock means going into a $5.4 billion market capitalization for a profitless company that may have $2 billion in revenue this year, assuming things work out. Combining the disparate business models of Sunrun and Vivint may deliver less savings than anticipated. The shape of the market in 2021, between the election and Tesla’s potential entry, remains uncertain.
My guess is that the stock will be riding the polls through November. The valuation right now is well ahead of fundamentals. It’s a speculation. There are too many uncertainties for me to say more.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
