Why Vivint Solar Has 100% Upside Potential
Credit Suisse analysts recently met with the management team of Vivint Solar Inc (NYSE: VSLR) and came away impressed with the prospects of this relatively new kid on the block in the publicly-traded solar arena.
The Vivint Solar business model targeting residential solar customers is most similar to the Elon Musk-backed SolarCity Corp (NASDAQ: SCTY).
Tale Of The Tape - 2015 YTD
Shares of Solar City have rewarded early shareholders with returns of ~300 percent. However, despite growing revenues at an impressive clip, the company is still not profitable.
Notably, both Vivint Solar and Solar City have a very high short interest.
The Blackstone Group LP (NYSE: BX) spun Vivint Solar out of its Vivint operating company in October 2014 and still owns a 78 percent interest in Vivint.
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, as of October 2014.
Vivint has a three year agreement to share leads exclusively with VSLR. So, is the Vivint Solar glass half-full or half-empty for investors?
Notably, Credit Suisse was one of the underwriters of the Vivint Solar IPO.
Credit Suisse - Vivint Solar: Maintain Outperform, PT Raised $21 to $22
The revised CS price target represents a 100 percent upside from the current VSLR $11 trading range and is based upon a discounted cash flow (DCF) model.
The CS model assumes Vivint Solar will see growth rates of:
- 93 percent in 2015
- 94 percent in 2016
- 43 percent in 2017; which implies total MWs deployed by the end of 2017 to be 1.9 GWs.
The CS DCF model is based on a 12 percent discount rate and assumes that half of the VSLR customers renew at the end of the initial 20-year lease.
Credit Suisse Rationale - Key Takeaways
1. Diversified Sales Efforts:
- Currently Vivint Solar obtains 95 percent of its customers from door-to-door sales efforts and related referrals.
- The company has plans to diversify its sales efforts to include: retail kiosks, direct mail and social media platforms.
- Credit Suisse indicated that the door-to-door initiative remains quite successful, but its related commission structure is a relatively expensive way to grow sales above current levels.
2. Improve Operations - Technology:
- Vivint Solar is investing $50 million in systems to make the sales to installation cycle more efficient.
- The new systems are currently being beta-tested in three markets, with Vivint Solar planning to roll it out company-wide in 2015 to all 39 sales offices.
3. Product Offerings:
- Vivint currently does not have a loan program in place for customers who would prefer to own their roof-top solar installation vs. leasing.
- Rolling out a loan program should lead to increased customer share for Vivint from its current sales efforts.
4. Commercial & Industrial:
- Vivint initially intends to target 0.5 to 1.0 MW systems.
- The company 2015 guidance does not include any revenues from this initiative, but could bump up 2016 revenues by ~10 percent.
- Buying for larger commercial/industrial projects could provide a cost reduction for buying a larger volume of power components.
5. Capital Strategies:
- Looking forward to 2016, Credit Suisse expects Vivint to diversify how it funds projects.
- A securitized debt offering, similar to SolarCity, could significantly reduce the amount of equity required for VSLR projects.
- CS sees the cost of Vivint tax equity partner funds becoming a near-term tailwind, rather than a drag on earnings, citing SolarCity's post-IPO experience.
Credit Suisse - VSLR Risk Factors
- Adverse Regulations - limitations on net-metering, etc.
- Future Growth - continued growth rate after 2017 when Federal ITC is reduced from 30 to 10 percent.
- Capital - both cost and availability.
- Competitive Environment
- Customer Default & Renewal Rates
- Blackstone Ownership - overhang on shares from 78 percent stake.
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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