Earnings in the residential solar business can be up and down depending on the quarter. But long-term, this is a business that could bring a lot of value to shareholders.
For Vivint Solar Inc (NYSE: VSLR), the fourth quarter may not have been exactly what investors expected -- the company reported a drop in revenue and a loss on a GAAP basis. But there was still a lot to like about the company's results.
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Vivint Solar reported a 5% drop in fourth-quarter revenue versus a year ago to $63.5 million, and a loss from operations of $40.0 million, or $0.11 per share, worse than a $26.9 million loss from operations a year ago.
The drop in both revenue and losses from operations was due to a shift from selling solar systems to customers to leasing more of them. Leases push revenue and earnings out to future years, which is why we saw the drop in results last quarter.
On the plus side, Vivint Solar is growing the amount, or value, it's retaining for shareholders. Retained value is the present value of the future cash flows that management expects from leased solar systems. At the end of the fourth quarter, the estimated net retained value was $1.11 billion, or $9.20 per share, nearly double where the stock trades today.
Costs are now a concern
One concerning aspect about Vivint Solar's report is that costs continue to rise. Solar system costs rose from $2.99 per watt a year ago to $3.18 per watt, driven by a jump in sales and marketing costs from $0.76 per watt to $1.06 per watt.
Residential solar companies have had a hard time keeping sales and marketing costs under control, and that was exactly what we saw from Vivint Solar last quarter.
Where does Vivint Solar go from here?
Vivint Solar is pushing into more states like Florida and Illinois, which will help fuel growth in the next few years. But I think management and investors should be looking at this as a value stock. The company has two decades of contracted cash flows from the solar systems it installs, and it can sell some of that cash or hold it on the balance sheet and let revenue and margins grow organically.
For investors, the value continues to build as Vivint Solar installs more solar systems across the country. Retained value isn't a perfect metric for the value on the balance sheet, but it's a decent proxy -- and with shares trading nearly 50% below retained value, I think this is a great value stock in solar energy.
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