Sunrun stands out in the growing residential solar industry

Published Mon, Oct 5 202012:43 PM EDTUpdated Tue, Oct 6 202012:01 PM EDT

(This story is for CNBC PRO subscribers only.) Residential solar power has been around for years: after all, President Jimmy Carter famously installed panels on the White House in 1979. But it has yet to go mainstream, so to speak, with just 3% of the 84 million eligible homes across the U.S. sporting rooftop panels. That might be about to change, however, with the latest announcements from one key company in the space — Sunrun . While there are currently a number of ways to invest in the rooftop solar ecosystem — from manufacturers to inverter companies to the installers themselves — Sunrun stands out. The company already has the largest share of the residential solar market, and its planned acquisition of Vivint Solar means its position as the leader in an ultra-competitive sector will be underscored. Size, customer count and brand recognition is especially important, given the industry's high customer acquisition cost. Sunrun is also building out its so-called virtual power plant capabilities, while its battery storage offering is becoming an increasingly popular alternative to an unreliable electricity grid. If the industry initially attracted eco-conscious consumers, people are now choosing to go solar based on economics. The declining cost of solar, paired with fluctuating electricity prices from traditional providers, means that in many places across the U.S., solar power is competitive, if not cheaper. The immediacy of climate change and more frequent power outages from outdated grids are also driving adoption. From an investment standpoint, industry growth in residential solar should continue to fuel companies' top-line results, while a greater focus on ESG, or environmental, social and governance metrics, should drive attention toward the space, all of which can benefit Sunrun in particular. Since its founding in 2007, Sunrun has focused on becoming the leading soup-to-nuts residential solar company. It provides everything from financing, to installation, to maintenance for its customers. The company currently operates in 22 states across the U.S., as well as in the District of Columbia and Puerto Rico. As of the end of June, it had 309,000 customers. "Especially with its coming acquisition of Vivint, Sunrun leads the industry in terms of scale and execution," Sam Schwerin, managing partner at Millennium Technology Value Partners and an investor in Sunrun since before the company went public, told CNBC. It's no secret that solar companies have faced challenges in the past, and there have been a number of high-profile bankruptcies in an industry that is so capital-intensive. Sunrun has not been immune to that volatility. Between February and March of 2020, for example, the stock dropped from $23.40 to $8.36 — a 64% loss — as the pandemic and shelter-in-place orders brought the solar industry to a near standstill. Since March's low, however, shares have jumped more than 850%. This in and of itself can be an issue for those who believe the stock has now gotten ahead of itself. Still, James Gartland, portfolio manager at Team Kaminsky, an investment team within the private asset management division of Neuberger Berman, noted that patience is warranted for new technologies and industries. In the case of Sunrun, that patience has been rewarded. "There's been a confluence of events that have worked in Sunrun's case over the course of the last year that are making investors more comfortable," said Gartland, who has owned Sunrun for several years. Solar-as-a-service Installing rooftop solar systems requires a significant outlay of capital at the outset. Sunrun comes in. The company provides solar-as-a-service, covering the financing, installation, repairs and upgrades, although it does not manufacture the equipment itself. Customers are offered solar leases or Power Purchase Agreements, which are typically 20 or 25-year contracts. In a lease, the homeowner pays a fixed monthly rate to lease the equipment and utilize the power generated, while a PPA is based on a fixed rate per kilowatt hour. Contracts vary, but they typically include an annual escalator. Sunrun estimates that it saves customers an average of 10% to 40% on electricity. Sunrun and residential solar companies more generally can be difficult to value, given their complex financials. But the company is cash-flow positive, and has seen its price per installed watt drop as it scales its operations. In 2019, Sunrun said it created $353 million in net present value, while generating $102 million in cash on an adjusted basis. Its creation cost dropped to $3.22 per watt on an adjusted basis in 2019, down from $4.06 per watt in 2015. However, that number jumped to $3.72 per watt in the second quarter during the pandemic. Net earning assets on an adjusted basis grew 14% year-over-year during the second quarter, to $1.6 billion. Residential solar companies generally have similar business models, although there are some differences. Sunrun is more vertically-integrated than competitor Sunnova , for example, which utilizes a third-party partnership model. SunPower , another key player, tried to also make its own panels, but after repeated challenges wound up spinning off the manufacturing unit in August. Residential solar booms as costs decline As the industry continues to grow, Sunrun is on track to expand its footprint. Total residential solar installations are forecast at 2,796 megawatts for this year, which is expected to jump 40% to 3,934 by 2025, according to a report from Wood Mackenzie and industry group Solar Energy Industries Association. This is set against the backdrop of declining residential solar costs due to technological advancements, as well as federal incentives. Costs have dropped 55% over the last decade, and are down 80% since 2006, when the tax credit was implemented, according to SEIA. The industry took a hit earlier this year as people stayed home amid the pandemic, but solar installations have since started to rebound. During the second quarter, Sunrun said it deployed 78 megawatts, down 24% year-over-year, and down from 97 megawatts during the first quarter. But the management team struck an optimistic tone during the second quarter earnings call, saying they expect megawatts deployed to rebound 20% during the third quarter. JPMorgan said second quarter results were "encouraging" and reflected a "compelling roadmap." The company also stressed that it has adapted to ongoing challenges from Covid-19. Sunrun shifted its sales strategy online and implemented other digital efforts, including drone technology for rooftop surveys. As solar costs continue to decline — and with fluctuating and rising utility prices — solar is becoming an increasingly attractive option for consumers. "I one hundred percent believe that people are choosing to go solar because of price," Abigail Hopper, CEO of SEIA, told CNBC. Sunrun buying Vivint Solar creates 'clear industry leader' In July, Sunrun announced its intention to purchase Vivint Solar, which will solidify the company's position as the leading player in the residential solar sphere. The all-stock deal was valued at $3.2 billion, including debt.