Solar stocks have been hammered over the past two years as oversupply ran into a weak point of demand and investors lost confidence in the yieldco market that emerged in 2014. Despite the drop in stocks, however, the industry's future is getting brighter. Solar energy is competing with fossil fuels in the U.S., Latin America, India, China, and nearly every location where it's given a chance to compete on equal footing.
Long-term, the solar industry has literally trillions of dollars in potential, and the companies that can capture a big chunk of the market should be big winners for investors. And these three companies have a lot of potential as the solar industry grows.
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The efficiency king
SunPower (NASDAQ: SPWR) has long been the solar industry's efficiency leader. Its X-Series solar panels are the most efficient production solar panels on the market and are taking market share from less efficient competitors in residential and commercial solar. But higher costs have always been a challenge for SunPower, particularly in utility-scale solar where it is competing against commodity solar panels coming from China in a market that's very cost sensitive.
Addressing the cost disadvantage in utility solar is arguably SunPower's biggest challenge and its greatest opportunity. What management has done is invest in new technology, acquired from Cogenra Solar, that shingles solar cells in a structure that makes a panel that's slightly more efficient than that of competitors for a similar (maybe slightly higher) cost. These P-Series panels, as they're known, are then paired with the Oasis utility solar solution, which includes everything from a drone that will map and design a solar system to racking and wiring that makes the power plant work. SunPower is making a full solar solution for utilities, rather than just selling panels, and if it's successful it will be a game changer financially.
SunPower isn't a sure bet in solar energy, but with a big lead in efficiency that drives residential and commercial solar and a more cost competitive solution for utility-scale projects it has a chance to be an industry leader for decades to come. And I would rather bet on a technology leader rather than a commodity solar manufacturer any day.
The yieldco that's all about solar
8point3 Energy Partners (NASDAQ: CAFD) is (to my knowledge) the only yieldco that only owns solar projects. And its projects have, on average, nearly 20 years of contracted revenue from selling electricity to utilities, ensuring that cash flows will keep coming in. As a result, the company pays a $1.06 annualized dividend, which is expected to grow 3% in the next two quarters at the very least.
On top of the dividend from contracted cash flows, sponsors First Solar and SunPower are looking at strategic alternatives for the yieldco, meaning they're looking for a potential buyer. If a buyout happens at a premium to today's price there could be a quick pop in the stock. Not a bad option when the worst case scenario is sitting on 8point3 Energy Partners' 7.1% dividend yield.
A residential solar play that might actually work
I haven't been big on national residential solar companies for a while, but Vivint Solar (NYSE: VSLR) has a chance to be a good investment if it plays its cards right. The stock is currently trading for $5.70 per share as I'm writing, and management has estimated there is $5.90 per share in net retained value on the balance sheet. If the company is about to securitize or sell some of those assets it could pay down debt, invest in growth, or return the money to shareholders.
Long-term, Vivint has the lowest costs among the national solar installers and may be able to transition to a business model with long-term value. Management has already shifted to selling solar systems, but the real opportunity is when net metering begins to diminish across the country and energy storage starts to be economical. Customers may not want to buy their own energy storage systems, choosing to rent or otherwise finance solar + storage solutions. That could make third party financing and algorithmic control of energy systems more valuable, which would fit Vivint Solar's business perfectly.
When the baseline is that there's enough value on the balance sheet to justify a stock and the upside is that there are opportunities for growth, I like the risk profile. And Vivint Solar has a shot at being a very good investment long-term.
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