SolarCity vs. Vivint Solar: The Residential Solar War Ignites

By Markets Fool.com

Continue Reading Below

SolarCity workers install rooftop solar system. Image source: SolarCity.

There's a two-man race at the moment atop the residential solar industry. In first place is SolarCity , who leads the industry in market share at 39%. In second place is Vivint Solar , the East Coast start-up that has at least 16% market share and is quickly gaining on its larger rival.

As the battle for residential solar heats up investors are wondering which stock is the better buy. The answer may not be as easy as it seems.

Image source: SolarCity.

Continue Reading Below

How do Vivint Solar and SolarCity stack up?
One of the biggest differences between Vivint Solar and SolarCity is scale. At the end of 2014, SolarCity had $5 billion in contracted payments from leases and power purchase agreements and $1.60 billion in retained value under contract. Vivint had a much smaller $1 billion in contracted payments and $383 million in retained value under contract.

While the difference in past performance is sizable, Vivint Solar is quickly catching up. Remember that Vivint didn't get into the solar business until just over three years ago, so it's going to have lower historical numbers than SolarCity.

If we look at performance from 2014 you can see that Vivint Solar was about a third of SolarCity's size operationally, but it's growing faster. Granted, this is from a smaller base, but remember that Vivint Solar's market cap is about a quarter of SolarCity's, even after a massive pop earlier this week.

Metric

SolarCity

Vivint Solar

Market Capitalization

$5 billion

$1.2 billion

2014 Installations

502 MW

155 MW

2014 Installation Growth

79%

167%

2015 Expected Growth

83%-99%

87%-100%*

Q4 2014 Cost per Watt

$2.86

$2.96

*Note: Vivint Solar's growth does not include commercial solar, which will be added to 2015 guidance.

Source: Company earnings releases.

The expected growth and cost per watt numbers are skewed a bit because Vivint Solar has historically only been a residential solar installer. Commercial projects will lower SolarCity's cost per watt comparison, so it's likely they're fairly close on a cost per watt basis.

Image source: Vivint Solar.

Vivint Solar is also expecting to get into the commercial solar market in 2015 and those installations will be on top of expected growth of up to 100%. By the end of 2015, Vivint Solar's installations should be greater than a third of SolarCity's, which isn't bad considering its stock is trading for a quarter of its competitor's.

Differences emerging long-term
On a strictly operational basis I think Vivint Solar is a great deal compared to SolarCity, but strategically SolarCity is probably the stronger company. The two biggest moves SolarCity has made to differentiate itself is buy high efficiency solar panel maker Silevo and launch the loan product MyPower.

If SolarCity can execute on building manufacturing capacity using Silevo technology it will be able to install more power per rooftop, increasing the efficiency of its installation teams. Long-term, this could be a huge competitive advantage.

The MyPower loan product sets SolarCity up well to transition to loans in the post investment tax credit world. Vivint Solar could follow suit, likely in partnering with a bank, but SolarCity's proactive move into loans is showing its leadership in the residential solar market.

6 of one, half dozen of the other
Before Thursday's incredible 33% jump I would have said the risk/reward profile easily favored Vivint Solar, despite SolarCity's strategic advantages. Today, they're probably fairly priced comparatively, but I'd still give Vivint Solar the edge just because it's the smaller company. Its smaller size means there's more upside for Vivint Solar and if it can out grow SolarCity it could close the market cap gap significantly.

While I'd give the nod to Vivint Solar between these two, I think investors looking to buy into this market should probably buy these two stocks in a basket. They're both major forces in the residential solar market and with comparable valuations buying both will reduce risk that may bring one or the other down. Long term, these are two residential solar giants and with a world of potential ahead I wouldn't be betting against either one.

The article SolarCity vs. Vivint Solar: The Residential Solar War Ignites originally appeared on Fool.com.

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.