The solar energy industry is on a massive growth swing, increasing installations from 7.7 GW to over 100 GW annually over the past decade. But while the industry has been growing, there have been a number of high profile bankruptcies in the industry as strategies shift all over the market.
In 2018, we're seeing many solar companies go back to their core competencies of manufacturing or sales, abandoning vertically integrated models that became burdensome the last few years. Three companies that I think have the right strategy behind them and growth ahead of them in 2018 are SolarEdge Technologies Inc (NASDAQ: SEDG), SunPower Corporation (NASDAQ: SPWR), and Vivint Solar Inc (NYSE: VSLR).
The solar inverter play
SolarEdge isn't the highest profile company in the solar industry, but it has arguably been the best value creator for investors over the last few years. You can see that revenue has nearly tripled since 2014 and it has generated consistent profits throughout.
What SolarEdge brings to the table is a series of products that are necessary for all residential solar installations and also difficult to commoditize because it's the "brains" of the solar system and the platform with which consumers and installers interact. The company's power optimizers and inverters can work with almost any solar panel, which has helped commoditize the panel itself, and its monitoring and control platform can be set up by any installer, effectively commoditizing installation. Sitting in the middle is a company that's growing the number of products it sells into the solar energy market, adding inverters and now energy storage in hopes of growing revenue even if megawatts installed were to flatten out.
Previous leaders in the residential solar inverter and component business have been disrupted by new innovations, so a lead isn't guaranteed. But with SolarEdge's lead in the market and its history of profitable growth, it has better odds than predecessors of maintaining its lead long term.
A solar comeback play
SunPower has seen ups and downs over the past decade but finally seems to have a strategy it can grow with long term. In residential and commercial solar the company pairs its premium, high-efficiency X-Series solar panels with inverters, racking, and other services for third-party installers.
Its P-Series solar panel is built with commodity solar cells but is assembled in a way that creates a panel more efficient than traditional competitors. Again, the product is paired with trackers, inverters, and even energy storage to provide a complete solution to solar large-scale commercial and utility solar developers.
The reason SunPower is a growth stock is that its X-Series production is growing steadily (and slowly), while P-Series manufacturing capacity is expected to grow from 1.1 GW today to as much as 5 GW in 2021 or 2022. Near term, production is expected to grow from 2.3 GW in capacity at the end of 2017 to 3.6 GW at the end of 2018. As production and revenue grow, its fixed operating costs will get spread around more and have a drastic impact on the bottom line. This should reduce losses and even push SunPower to profitability, something the company has been sorely lacking the last few years. It's a risky bet in solar given the recent losses and risks that increased production won't result in positive net income, but SunPower could also be a big growth story for the next decade.
The residential solar play
Residential solar has stagnated in the U.S., but that doesn't mean Vivint Solar isn't going to grow significantly in 2018. Growth will be driven by a transition from solar leases, where customers pay for a solar-power system over 20 years or more, to cash and conventional loan sales, where cash is received upfront and the developer no longer owns the panels themselves. The financial impact is that Vivint Solar's revenue can grow even if megawatts installed stay flat.
For example, in the fourth quarter of 2017 total revenue was up 60% to $66.8 million, despite installations falling from 47.1 MW a year ago to 44.6 MW. At the current rate of installations, Vivint Solar could grow to around $600 million in annual revenue (assuming around 200 MW installed at $3 per watt), up from $268 million in 2017 just by moving to cash and loan sales and resulting in a projected $52 million operating profit given 2017 operating expenses and fourth quarter gross margins. As Vivint Solar's transition to cash and loan sales continues, there's a lot of growth potential ahead and it'll reduce the risk for the company, which is great news for investors.
Growth comes with risk in solar energy
While these companies have their own growth strategies that could generate value, investors should keep in mind that growth hasn't always been the only measure of value creation to pay attention to in the solar industry long term. Keep an eye on margins and profitability as these companies grow because if both are shrinking as production or installations increase it could ultimately be bad news for investors if they get spread too thin.
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