Top national residential solar installers like SolarCity (SCTY), Vivint Solar (NYSE:VSLR) and Sunrun (NASDAQ:RUN) are losing ground to regional residential solar installers for the first time in recent memory. The degree at which the US residential solar trend has shifted is perhaps most shocking. Whereas the top three residential solar installers (SolarCity, Vivint Solar, and Sunrun) were growing faster than regional installers by a rather healthy margin in years past, this has completely changed in Q1.
The top three residential solar installers experienced overall growth rates of 101% and 121% in Q1 of 2014 and Q1 of 2015 respectively. In contrast, the top 4 - 10 residential solar installers experienced overall growth rates of 78% and 101% in those same time periods respectively. In Q1 of 2016, however, the top three residential solar installers only recorded a growth figure of 38% as opposed to the 69% recorded by the top 4 - 10 installers. This massive shift in momentum spells trouble for Vivint Solar, Sunrun, and even residential solar standout SolarCity.
The leading US national residential solar companies are starting to lose ground to regional installers.
Source: GTM Research
The Regional Installer Threat
While this most recent industry data can be viewed of as a one-off given the longer-term past trend, there are still many reasons for top residential solar companies to be extremely worried. On top of the fact that the Q1 growth decline of the top three residential solar installers was extremely steep, many had already been predicting this recent trend. Given that most major installation/construction industries are dominated by regional installers, it follows that residential solar would also eventually be dominated by regional installers.
The Q1 industry data only serves to reinforce this argument, especially considering the degree at which regional installers are starting to overtake leading installers in terms of growth. As such, SolarCity, Vivint Solar, and Sunrun investors should be extremely wary moving forward. If the trend of regional installers overtaking leading national installers continues, the growth thesis of the leading residential solar companies will be seriously challenged.
The leading residential solar companies are largely betting on the fact that growth will remain robust for the foreseeable future. If regional installers start to take market share at the current rate, such growth will become increasingly hard to come by. For the first time in many years, it appears as if the main threat to leading residential solar companies is coming from inside rather than outside the industry. While electric utilities still represent a huge long-term threat to leading residential solar companies, regional installers may be an even bigger threat to these companies.
Not All Is Lost
The growth of residential solar loans is naturally coinciding with the resurgence of regional residential solar installers. As the advantages of scale and vertical integration are not as apparent in the residential solar loan market, the top residential solar companies should have a much harder time competing in this market. However, the top residential solar companies have spent relatively little time developing their loan businesses. These leading companies could conceivably recover on the growth front (albeit with lower margins) if they start to focus more heavily on residential solar loan market.
After all, there are still some benefits of scale and vertical integration in the loan market. For instance, residential solar companies like SolarCity will still have a brand and financial advantage over regional installers. Moreover, large national residential solar installers could save on costs in ways that are impossible for smaller installers. For instance, the integration of module manufacturing has potential to reduce logistics costs and eliminate resale costs. The one major downside to module manufacturing integration is the extreme difficulty associated with module manufacturing.
In addition, the recent dramatic slowdown of leading residential solar companies could just be a result of volatility. While the Q1 growth of the top three residential solar companies declined dramatically compared to previous years, the growth of the top 4 - 10 remains somewhat stagnant. This could mean that the residential solar momentum shift is more a result of large national residential solar companies temporarily underperforming as opposed to regional companies becoming more competitive.
The next few quarters should provide a much clearer picture on how the long-term residential solar industry will play out. If companies like SolarCity, Vivint Solar, and Sunrun continue to experience low levels of growth while regional installers continue to take market share, these companies will likely have a far tougher road than originally imagined. On the other hand, if these companies once again start to grow at healthy rates, they could experience an upsurge.
If Tesla (NASDAQ:TSLA) ultimately decides to acquire SolarCity, Vivint Solar and Sunrun will be the few remaining national residential solar pure plays (or close to it). Given the fact that both Vivint Solar and Sunrun are experiencing enormous difficulties aside from just slowing growth, investors would be wise to avoid these companies. Compared to SolarCity, for instance, Vivint Solar and Sunrun are experiencing major cost issues.
Even if regional residential solar installers start to take market share from leading residential solar companies on a permanent basis, SolarCity could conceivably weather the storm. The company has first-rate financial capabilities, a superior brand name, an unparalleled cost structure, and a highly integrated business (more so than Vivint Solar or Sunrun). In addition, SolarCity is on a path towards far greater diversification than its main competitors.
However, it would not be unwise to avoid even SolarCity for now given the chaos surrounding the company. After all, Tesla just made an offer to acquire SolarCity, which will likely cause SolarCity to experience an extreme amount of volatility in the near-term as sentiments regarding the merits of this potential merger continue to shift. As for now, it would be best to avoid leading residential solar installers given the most recent industry data.
Disclosure: I am/we are long SCTY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.