Sunrun (NASDAQ: RUN) has cemented itself as the largest solar pure-play with its $3.2 billion acquisition of Vivint Solar. The acquisition of Vivint allows Sunrun to expand its customer base further and benefit from cost synergies. However, the threat of Tesla (NASDAQ: TSLA) appears to be a significant threat to the company moving forward. Additionally, the underlying issues with the deal and the relatively weak brand equity makes Sunrun stock a risky bet.
Vivint Solar and Sunrun boast a combined customer base of roughly 500,000. They accounted for 17.5% of the US residential solar markets last year. Moreover, the combined company is likely to lower operational expenses and greater leverage in dealing with its suppliers and creditors. However, despite the dealâ€™s synergies, there are a few fundamental problems that cannot be overlooked. Adding to the complications is the growing threat from Tesla and its brand power.
Sunrunâ€™s acquisition of Vivint makes it an unquestionable juggernaut of residential solar. However, it does little to solve the underlying troubles for the company. Solar technology is evolving rapidly but is unproven so far. Hence, such a business model could prove risky in the long run, especially if companies such as Sunrun are unable to innovate. That also raises questions about the combined value of both companies at over $9 billion. Such a lofty valuation cannot be justified with the incredibly risky business model of both companies.
Additionally, sales and marketing costs continue to be a thorn in the sides for both companies. The combination of both companies will have little effect on their growing marketing expenses. On the flip side, its competition, Tesla, has done exceedingly well in limiting its expenses.
For instance, it has zero paid campaigns due to its massive organic engagements. Conversely, a whopping 36.7% of Vivint Solarâ€™s cost per watt is attributable to its marketing expenses. Therefore, Sunrun will continue to spend a handsome amount of money on marketing for the foreseeable future. It will be exceedingly difficult for Sunrun to develop a highly recognizable brand such as Tesla and compete with it on price.
Tesla aims to change the dynamic of the residential solar business. Its solar roof product uses tiles to convert sunlight into energy instead of panels. Solar tiles are more aesthetically appealing than rooftop panels, which has been one of the major concerns for potential customers. While Teslaâ€™s product may cost a lot more, customers would be willing to bear the additional expense due to its track record.
Tesla has been hugely successful with its Electric Vehicle business and has enough resources to focus its solar business attention. Therefore, it is more than likely for Tesla to disrupt the solar industry and threaten established players such as Sunrun. Teslaâ€™s battery innovation is arguably the most significant threat for established solar companies.
Currently, Tesla has only a 4.6% market share in the US residential solar market. Established players such as Sunrun are far ahead, but Teslaâ€™s ability to innovate acts as a pendulum of doom. Additionally, its cost advantages will allow Tesla to scale its solar business with minimal marketing efforts rapidly. Hence, Tesla could potentially offer the cheapest solar solutions in the industry.
Sunrunâ€™s acquisition of Vivint Solar firmly establishes it as the leading company in the residential solar industry. It will help in significantly expanding its customer base and result in substantial cost synergies. However, Sunrunâ€™s relatively weak brand equity and the growing threat of competitors such as Tesla raises questions about the companyâ€™s sky-high valuation.
If Tesla continues on the path towards building its solar business, it is likely to take a significant chunk of the market share from Sunrun. Hence, for Sunrun, it is imperative to keep innovating and finding solutions that appeal to its customers. It also needs to work on developing awareness of its brand to curb its marketing expenses. Nonetheless, itâ€™s tough to invest in Sunrun stock at this time.
OnÂ the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.