It could be the first residential solar company to go public in the U.S. since 2015.
Other important residential solar firms — Sunrun, Vivint and Tesla — all went public between 2012 and 2015, when the residential solar market has been growing at a speed of approximately 60 percent each year. But today’s marketplace circumstance is significantly different. Sunnova will be moving public as residential solar expansion moderates, market penetration intensifies customer-acquisition challenges, and customers turn increasingly toward direct possession of their solar systems.
In a new Wood Mackenzie Power & Renewables report, we summarize three ways that Sunnova can flourish after its IPO. The high level takeaways follow.
First, Sunnova will need to be geographically diverse by expanding its foundation of installer spouses.
While Sunnova points to federal residential solar market penetration of less than 3 percent since justification for its future growth prospects, Wood Mackenzie estimates that present market penetration is more than 5 percent in New Jersey and more than 15 percent in California.
Both markets are expected to determine single-digit-percentage compound annual growth rates from 2019 to 2024, in comparison to multiple emerging state markets with CAGRs north of 15 percent. And Sunnova’s company is not just concentrated ; 52 percent of Sunnova’s 2018 installations came out of 1 installer, Trinity Solar, that can be active largely in New Jersey and Massachusetts.
Secondly, Sunnova will want to better manage its operating costs to reach maturity.
Sunnova incurred operating losses in 2017, 2018 and the first quarter of 2019. At the exact same time, the other prominent publicly owned residential solar financiers — Sunrun and Vivint — have had much more favorable financial success.
Sunrun has come to be the top residential solar financier when reaching positive structural cash flow and positive earnings per share (EPS) for its shareholders. Vivint has not attained continuously positive EPS for shareholders, however, the company’s gross margins and total cash position have improved markedly since the firm changed its incentive structure to reward more profitable sales.
Again, Sunnova’s business model should be an edge here unlike Sunrun or Vivint, which have substantial overhead from their installation businesses, Sunnova has less overhead and much more flexibility.
But Sunnova has yet to attain profitability, as, as it says in its own pre-IPO submitting, the company has continued to invest in the business to fund expansion. The filing also points out that the company’s operational expenses are expected to increase since it makes important investments in operational expansion and internal infrastructure in advance of the IPO.
To be fair, financing growth at the cost of profitability isn’t unusual in the solar sector. And Sunnova’s financials have been improving — 2018 brought earnings growth and a lower net loss. As Sunnova moves forward, the company is going to have to keep on improving this financial picture sufficient to offset increased operating costs and investments.
Ultimately, Sunnova will need to focus on the solar loan enterprise.
Loans became the industry’s most dominant form of financing in 2018, and Sunnova is well positioned to serve this market, offering power-purchase agreements, leases and loan options to residential solar customers. While third-party possession choices are expected to compose a consistent one third of the housing solar marketplace in the next several years, loans are predicted to grow to over 50 percent of the marketplace.
We also expect smaller, local installers to undergo double-digit growth in the next few years, with only 15 to 18 percent of their business coming from third-party ownership options. To take advantage of this growth, Sunnova will need to grow the loan segment of its business profitably, as loans now make up less than 25 percent of its business.
