Vivint Solar (VSLR): The Next SolarCity?

Vivint Solar (VSLR) might have a sunny long-term outlook, but Wednesday’s Vivint IPO was buried in clouds.

Vivint Solar IPO VSLRVivint issued 20.6 million shares of VSLR stock at $16, which represented the bottom of its expected range ($16 to $18). Shares didn’t see much follow-through buying either, with VSLR up less than 5% in early morning trading.

Still, Vivint Solar could be an interesting opportunity for investors.

Vivint’s roots extend back to 1999, when founder Todd Pedersen saw an opportunity to sell high-end security systems for homes. Growth was strong and the company eventually entered other segments, such as home automation, but the game-changer came in 2011 when Vivint entered the residential solar installation market.

To gain traction quickly, the company used an innovative business model of selling systems with little or no upfront costs. Instead, Vivint offered 20-year contracts, with annual savings of 15% to 30% when compared to typical utility rates.

Because of this, the company was able to generate predictable, recurring cash flows, which could be packaged into funds for outside investors. Thanks to backing by private equity titan Blackstone (BX), VSLR has had little trouble putting these vehicles together.

Growth has been staggering. Since May 2011, Vivint has installed systems with a capacity of 129.7 megawatts for more than 21,900 homes in Arizona, California, Hawaii, Maryland, Massachusetts, New Jersey and New York. This makes VSLR the No. 2 player in the U.S. market, behind only SolarCity (SCTY).

A key part of Vivint’s success is its full-service approach; VSLR provides the initial consultation with customers, design and engineering, installation and ongoing monitoring and services. The go-to-market strategy relying on door-to-door selling also has been a winner; during the past year, Vivint Solar has set up 21 new sales offices, added to 16 existing, and increased the number of active direct sellers from 153 to 489.

Plus, the market opportunity also remains substantial. GTM Research shows that solar energy has penetrated just 1% of the residential market, and forecasts that the compound annual growth rate for installed capacity will be a hefty 37% from 2012 to 2018.

Vivint’s financials certainly are enough to catch the attention of growth investors. First-half 2014 revenues soared by more than 400% to $10.1 million. Yes, VSLR suffered a $76.1 million loss, but that’s to be expected from a company building up its infrastructure. The proceeds of the IPO will help to pay off debt, and the creation of outside funds also will help to provide financing for growth.

It’s tempting to look at how SolarCity has performed since its late 2012 IPO — namely it has returned a staggering 650%. But that doesn’t mean VSLR will enjoy a similar fortune. SolarCity started at a much lower valuation and also benefits from having the support of uber-entrepreneur Elon Musk, the man behind Tesla Motors (TSLA) and SpaceX.

Still, the Vivint IPO could be a nice long-term winner for investors. The recent volatility in markets likely contributed to its weak opening, plus the Alibaba (BABA) IPO took up a lot of money set aside for new offerings.

It might be worth waiting a bit on VSLR for better prices, but if investors want to play the solar space, Vivint Solar looks like a good choice.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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