It’s been a couple of weeks since Sunrun (NASDAQ:RUN) completed its all-stock purchase of Vivint Solar for $1.46 billion and the assumption of approximately $1.7 billion in debt. Owners of RUN stock will own 64% of the combined company, while Vivint shareholders will own the rest.
Data from BloombergNEF, which specializes in the energy industry, suggests that Americans will install 3 gigawatts (GW) of solar panels on their roofs in 2020 and an estimated 3.6 GW in 2021. Both annual records.
“The push for renewables is really strong,” said Tara Narayanan, an analyst quoted in the Bloomberg Green piece. “It’s allowed the sector to shake off the worst of the plague and some natural disasters.”
When reading numbers like the ones above, the natural inclination is to assume this is good news for installers such as Sunrun. More GW’s means more revenue for the company, etc.
That’s the theory. But in reality, that’s not always the case. RUN stock could benefit from America’s love affair with solar. It could also fall flat on its face.
Here’s a look at both sides of the story.
The First Way to Look at Vivint Combination
There are two ways to look at this consolidation move in the residential solar market in this country.
The first is that the Sunrun/Vivint deal brings together two unprofitable businesses. While the combined entity will be bigger, there’s a good possibility that it won’t be better or even profitable.
Solar power marketing research expert Paula Mints discussed the combination in September as part of her monthly newsletter, the Solar Flare. She wasn’t very enthusiastic about the deal.
“The residential solar lease and residential PPA offers little synergy for customers, other than giving away their ITC [investment tax credit] and paying much more over time for having a solar system on their roof than they would if they bought it in the first place,” Mints wrote.
“Companies operating in the space need the cheapest cost of hardware (not always the best), fastest installs (not always the best), to reuse equipment when customers withdraw (including inverters), and to keep on adding customers to feed the machine.”
Mints reminded her readers about the 2016 Solar City acquisition by Tesla (NASDAQ:TSLA) that was supposed to deliver all kinds of good things for Tesla shareholders. As it turned out, that didn’t happen.
The Second Way to Consider Sunrun’s Buy
The second way to look at the combination is that scale is the only way to get to profitability in the solar energy journey. Together, Sunrun will have a 17.5% market share, about four times Tesla’s market share.
“We have big ambitions for what we can accomplish together,” Sunrun CEO Lynn Jurich said in July when the merger was first announced. “We are only scratching the surface of our opportunity; today only 3 percent of [U.S.] households have made the transition to home solar.”
“At a larger scale, with more customers and a lower cost structure, Sunrun will be a meaningful contributor to a fully renewable and electrified energy system,”
While it’s a nice thought to think Americans will do the smart thing from a financial perspective and buy the solar panels rather than lease them, for most people, the lease option remains a more realistic option, I would think.
The fact is, Sunrun’s biggest challenge is the cost of acquiring customers. It’s very high.
“Sunrun has said that they are looking to Vivint’s direct sales channel to help support their growth, but most active national players have been moving away from door-to-door sales, in part because it is the most cost-intensive customer-acquisition channel,” said Wood Mackenzie senior solar analyst Austin Perea in July.
Oh, and it doesn’t hurt that the combination should produce $90 million in annual cost synergies within 18 months.
The Bottom Line for RUN Stock
Earlier in October, I recommended Sunrun as one of 10 small-cap stocks to buy from some of America’s best ETFs.
My recommendation didn’t consider Mints’ argument that customers end up paying more over the long haul by leasing than buying. Billionaire John Paul Getty used to say, “If it appreciates, buy it. If it depreciates, lease it.”
Well, as far as I can tell, solar panels depreciate. Maybe not to the extent of a car or truck, but they certainly lose their value over time.
“As the company says in its August 2020 presentation, it’s installing a new solar-powered energy system every two minutes. Founded in 2007, the need for solar power and the storage systems that come with them has accelerated in recent years as power outages have become more commonplace,” I wrote on Oct. 7.
“Sure, over the life of a solar-powered system, you might save a few thousand, but for me, the real attraction is the clean energy created by those systems.”
Am I crazy to think that 97% of American households that don’t have solar power would install panels on their roofs merely because of the clean energy and not the cost savings over the long haul?
Will the Vivint deal deliver a pathway to profitability? We will find out.
Until Sunrun gives me a reason to doubt it, RUN remains on my long-term buy list.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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