Why Vivint Solar Is Up 73% in 2018

2018 has been a surprisingly strong year for the once-beaten down Vivint Solar Inc (NYSE: VSLR). It was early in 2018 that President Trump slapped tariffs on solar panel imports, raising the cost of almost every solar installation countrywide. Rising interest rates have also been a big headwind that asset owners like Vivint Solar have to deal with.

Despite these headwinds, Vivint Solar's stock is up 73% on the year, and doesn't show any signs of slowing down. Here's why investors are finally bullish on this solar stock.

Why tariffs are no longer a big worry

When tariffs were announced on solar panels it meant an immediate 30% increase in component costs for solar installers like Vivint Solar. But the increase was short-lived, and by mid-year the cost of solar panels had plummeted about 30% as China's demand for solar panels cratered. At the end of the day, the net cost of the imported solar panel was actually down, even with tariffs.

As evidence, Vivint Solar reported that the cost of solar installations was $3.06 per watt in the third quarter, its lowest cost of the year. Driving the reduction was a record-low $1.77 per watt installation cost, which was down from $1.93 per watt in the first quarter of the year. Most of that drop in costs can be attributed directly to falling solar panel costs.

Interest rates aren't killing solar... yet

One of the biggest threats to solar companies like Vivint Solar is rising interest rates. The company builds solar systems on the balance sheet and then sells or holds future cash flows to generate long-term value. If interest rates are going up, the value of those future cash flows goes down, so rising rates are a threat to the business. Interest rates have been up so far in 2018, but not as much as some investors may have feared.

If the 10-year Treasury rate, which is a benchmark, only creeps up slowly, it would be good for solar installers like Vivint Solar.

A big competitor continues to decline

The big name in solar used to be SolarCity, which is now owned by Tesla. The company had a commanding market share in residential solar and was the one company Vivint Solar couldn't beat. But SolarCity and Tesla are now beating themselves in solar.

Since the fourth quarter of 2016, Tesla's quarterly solar installations have fallen from 201 megawatts (MW) to 93 MW, and there's no sign the company will begin growing the solar business again. Maybe the best thing that could happen to Vivint Solar is a big competitor collapsing, and that's exactly what's happened to Tesla's solar business over the last two years.

Seeing value in a solar stock

The final thing I think investors are seeing in Vivint Solar is value in the assets already on the balance sheet. All of the leases the company has signed have residual value -- the present value of future cash flows, which continues to build each quarter.

At the end of 2017, management estimated residual value to be $7.07 per share; after the third quarter that has grown to $8.11 per share. Even after the jump so far this year -- shares trade around $7 -- this stock may be undervalued, especially if Vivint Solar continues to rack up value the way it has in 2018.

10 stocks we like better than Vivint SolarWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Vivint Solar wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.