The US solar industry has seen explosive growth in 2013, and three companies have received the lion's share of the attention: First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), and SolarCity (NASDAQ:SCTY) are all up over 170% in the past year. These are the darlings of the industry, and with good reason. Chinese competitors are tanking, solar power is expanding quickly in the US, and solar is on the verge of grid parity. I personally hold some SolarCity stock because I like their business model and I like their strategy of heavier spending now, in order to secure more predictable, long-term revenue in the future.
However, a recently-published article suggests the Big 3 are the only good options. The author says, "There are three -- and only three -- solar companies I would consider investing in." He and I agree, Chinese solar stocks are too risky. But what if there exists a smaller American company that also offers good products and has good growth potential? Real Goods Solar (RSOL) may be this diamond in the rough.
Real Goods Solar is an installer based in Louisville, Colorado and operating in eleven states; they have deployed over 100 MW of solar since 2008. They have found particular success with the educational market. Big institutions such as Wal-Mart (NYSE:WMT) and the military seem to be deploying more solar because it saves them money, and schools and universities are no exception. I was pleased to hear, on the May 9 earnings release conference call, that the company has cut operating expenses by 6% in the past year.
There are two things about the company, in particular, that catch my eye. Firstly, they discussed a partnership with Lennar Corporation (NYSE:LEN) to begin installing solar on new homes. Lennar is the third-largest homebuilder in the US. Their upcoming program (sunstreetenergy.com) will allow homebuyers to install solar with no money down at a guaranteed 20% lower-than-grid cost. Real Goods Solar is a "strategic supplier" for the program. The CEO would not discuss specific details during the earnings release. However, he was goaded into saying the impact of the new installations "will not be trivial."
The other exciting facet of the company is their new line of "PowerOn" pre-engineered solar modules. At $2.33/Watt these modules are very attractively priced (the national average is about $4/Watt). They include a warranty, site inspection, installation, and utility connection. If I were buying a rooftop solar system today, the value of this system would have me interested. So, I have no doubt the PowerOn systems will be popular. I imagine the company will use this same system on the Lennar installations, and that may be the reason why they can price it so low.
So the case has been made for the strong growth potential of Real Goods Solar. Now let's take a look at its valuation. I will compare, specifically, against SolarCity, because both companies are primarily focused on solar installation. We will see that Real Goods Solar is approximately 10% of the size of SolarCity based on Megawatts installed. By revenue, Real Goods Solar is 56% of SolarCity's size, but its market capitalization is only 2% of SolarCity's. I believe this is an indication that Real Goods Solar is under-priced.
Valuation Comparison: SolarCity and Real Goods Solar
|SolarCity||Real Goods Solar|
|Megawatts installed in Q1 2013||46||4.66|
|Revenue in Q1 2013||30||16.8|
|Change in stock price, y/y||up 173%||up 27.7%|
In the interest of writing a balanced article, there are some negative aspects of the stock that should be addressed. When one performs a ticker search for RSOL, one of the top results is "Reform Sex Offender Laws, Inc." :P
But seriously, R.G.S. saw an 8% decline in revenue from Q1 2012 to Q1 2013. A decline in customer prices was specifically cited as the reason for reduced revenue despite more Megawatts installed. While the decline is worrisome, it was part of a broader trend across the entire solar industry, so I don't see it as a particularly negative signal.
The other (_big_) question mark is the Lennar partnership. Certainly the partnership will have a positive impact for Real Goods Solar, but the extent of the impact is unknown. The public does not know, at this point, how many other "strategic suppliers" there may be or what the size of the endeavor is.
If the Lennar partnership leads to thousands of new installations, this stock may go through the roof. At a market capitalization of $50 million, it won't take much to give this company a strong upward boost. The modest valuation of the stock, combined with its highly competitive PowerOn system, is the reason why I'm long on Real Goods Solar.
Additional disclosure: I am long RSOL and SCTY.