A Look At Vivint Solar Post-IPO
On Monday, October 27, five Wall Street investment banking firms initiated coverage of fast growing Vivint Solar Inc (NYSE: VSLR) with a wide range of price targets.
Private equity giant The Blackstone Group L.P. (NYSE: BX) sponsored the Vivint Solar IPO, which was priced at $16.00 per share and raised $300 million. However, since October 1, when VSLR opened for trading at $17.24, shares have been trading significantly below the IPO price.
Blackstone continues to own a majority stake in this new residential solar installation company, having retained a 78-percent ownership stake in the company.
After the "quiet period" elapsed for investment banks involved in the Vivint Solar IPO, Deutsche Bank, Goldman Sachs, Credit Suisse and Bank of America/Merrill Lynch initiated Vivint at Buy/Outperform ratings, with price targets ranging from $20.00 to $24.00 per share. The Bank of America $24 price target represents a 75-percent upside based upon the most recent $13.74 closing price.
Citigroup initiated coverage of Vivint Solar at Neutral with a $16 price target, and mentioned in a note that it chose to "remain on the sidelines for now."
Partly Cloudy: Citigroup - Neutral $16 Price Target
According to Citi, "VSLR has an attractive sales platform, financing capability, strong positioning, and cost structure that drive robust growth but there is an increased perception of risk associated with the business model due to potential competition from utilities, an ITC step down, fixed charges, financing bottlenecks, and low barriers to entry."
While $16 does represent a ~16 percent upside from the most recent closing price, Citi selecting the IPO share price as a target appears to speak volumes regarding its risk/reward concerns.
Mostly Sunny: Credit Suisse - Outperform $21 Price Target
The analysts at Credit Suisse perceive more value in the Vivint/Vivint Solar relationship and unique sales model.
Blackstone purchased Vivint, the second largest U.S. home automation/security firm for ~$2 billion back in 2012. Vivint has ~850,000 residential customers and employs more than 7,000, including a large door-to-door sales force.
Vivint Solar also employs a door-to-door sales strategy. This results in a lower cost to acquire new customers compared to its competitors, and also results in cost efficiencies derived from the neighborhood clustering of installations.
Vivint and Vivint Solar have a three-year agreement in place to exclusively share customer leads and not compete in each other's core business. This gives Vivint Solar an important customer acquisition edge versus its competitors in existing Vivint markets during this important time horizon.
Why Three Years Is Important
There is a 30-percent federal Investment Tax Credit (ITC) that is available for residential solar installations through 2017. This ITC is currently scheduled to be reduced to 10 percent after 2017. There are concerns that this may result in a decrease in the adoption rate of new solar installations by homeowners after 2017.
However, Credit Suisse also sees this as a potential advantage for the large solar firms such as Vivint Solar and the industry leader SolarCity Corp (NASDAQ: SCTY).
The rationale for this being there are economies of scale to be had in the solar industry, which could result in increased market share -- as well as opportunities for acquisitions -- by the dominant solar players if the ITC is reduced or eliminated.
The chart above shows that this trend appears to have already started. Vivint Solar has the added advantage of Blackstone's capabilities in M&A and unparalleled access to capital markets.
How Has SolarCity Fared Since Its IPO?
Investors who got on board early on with SolarCity have done quite well, although it has been a rocky road of late. There is a large short interest in SolarCity shares that also serves to exacerbate movements in its stock price.
Investors interested in this sector have many risks to consider prior to the purchase of shares.
In addition to the reduction and potential phasing out of the ITC, there are several other big picture risks for this relatively new solar energy sector, including:
- Regulatory risks at the state and local level.
- Potential increased competition from local utilities.
- The rules and pricing surrounding the "net-metering" of homes. (The ability to sell back excess unused electricity to the power grid).
- Advances or lack of advances in battery technology. (More efficient electrical energy storage could be a potential boon for solar installers).
- Reduction in the cost of fossil fuels or other factors that might make signing long-term power agreements with solar energy companies less attractive in the future.
Providing homeowners and businesses with clean, renewable energy sources is certainly in the public interest. The residential solar industry is in its infancy, with less than 1 percent market penetration in the U.S. and plenty of rooftops to target for growth.
Although there are certainly risks, Blackstone's track record of successfully bringing companies public lends credence to the long-term viability of Vivint Solar for investors looking at this evolving new business model.
Latest Ratings for VSLR
|Nov 2016||JMP Securities||Downgrades||Market Outperform||Market Perform|
|Nov 2016||Credit Suisse||Assumes||Neutral|
|Sep 2016||JMP Securities||Initiates Coverage on||Market Perform|
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