In a recent 13G filing, billionaire Chase Coleman’s Tiger Global Management disclosed a new position in Sunrun Inc. (NASDAQ:RUN), a small-cap residential solar installer. According to the filing, at the end of March, Tiger Global Management acquired 8.41 million shares of the company, which represent 7.8%. The stake makes Tiger Global one of the largest institutional shareholders of Sunrun, only behind FMR LLC and VC firm Foundation capital, which hold 16.02 million shares and 8.87 million shares. As a side note, on our website you can follow the hedge funds you like and receive real-time alerts when they disclose changes in their holdings via 13D or 13G filings. Just sign up and add your favorite hedge funds or companies to your follow list to start receiving email alerts.
The filing caught our attention, because Tiger Global is not really the fund to invest in solar, even though Chase Coleman is known for his tech investing prowess. We looked back and saw that Tiger Global hasn’t invested in solar companies in almost a decade. During the fourth quarter of 2008, Tiger Global was one of the top buyers of solar stocks, having acquired stakes in JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO) and Yingli Green Energy Holding Co Ltd (ADR) (NYSE:YGE) and boosting the stake in LDK Solar. However, during the first quarter of 2009, all solar holdings from Tiger Global’s portfolio were closed. Between 2010 and 2011, Tiger Global also held shares of Power One (acquired in 2013 by ABB).
Tiger Global didn’t disclose publicly why it has invested in Sunrun or whether the position is going to stay in the fund’s equity portfolio for a long time, but we have decided to take a closer look at the company nonetheless in order to figure out some rationale behind the move, or at least make some guesses about it.
Let’s start with the industry. In the last couple of years, the solar industry has been a paradox of sorts. In 2016, the US saw 15 Gigawatts of solar capacity installed, a record. At the same time, the largest bankruptcy of that year was Sunedison, which filed for Chapter 11 after months of struggle as debt-fueled acquisitions proved unsustainable. SolarCity went from being one of the hottest stocks in the industry to requiring help from Tesla Inc. (NASDAQ:TSLA). Between 2011 and 2014, over 100 solar companies in Europe and the US declared bankruptcy, shut down or acquired. Some of the top companies like First Solar, Inc. (NASDAQ:FSLR), or Canadian Solar Inc. (NASDAQ:CSIQ) also saw their stock prices plunge between 2015 and 2016.
There are several reasons why solar companies got in trouble. The main problem was actually that the solar industry became a victim of its own success. The popularity of solar panels created a high growth industry with many companies wanting a slice. Many companies started to chase this growth, often sacrificing returns in the process. At the same time, solar projects require high costs, getting more projects require companies to expand the number of their employees, build new factories to manufacture panels. When companies tried to outbid each other by offering lower price per kWh, they obtained very little profit.
Another reason concerns residential solar installers. For years, people had been investing money into installing solar panels on their roofs or near their houses in order to save costs and even make money through feeding the excess electricity back into the grid. Between 2011 and 2017, installations of rooftop solar panels surged by over 800%, according to some estimates However, the popularity of rooftop panels was not appreciated by utility companies, who, armed with lobbyists, launched campaigns in state capitals against rooftop solar installations. Utilities considered that it was unfair that households were allowed to sell excess electricity at retail price (a practice known as net metering), because it raised prices for households that couldn’t afford or didn’t want solar panels. The campaigns were pretty successful with many states deciding to phase out net metering. Other states introduced higher fees that eliminate the incentives households get in the form of lower electricity bills.
In this way, in 2017, there were 10.6 GW of new capacity installed in the US, down by 30% from 2016 and there are currently over 53 GW of total capacity installed, according to SEIA. Residential installations fell by 16% last year to a total of 2,227 megawatts installed in 2017.
Looking ahead, the US solar industry is expected to continue to grow and total capacity is expected to double by 2023. The recently-introduced tariffs of 30% on imported photovoltaic panels is expected to slow down this growth to some degree, but there are some factors to consider. First, the tariff is on panels, which represent just a fraction of the total cost of solar installation process. A big part of the cost are expenses associated with marketing, labor, permitting, which are carried by installers. While the tariffs will help US manufacturers, the cost of higher panels will be transferred to installers and households, although it is expected to be incremental.
Which brings us to Sunrun. Sunrun last year became the largest residential solar installer in the US, surpassing Tesla Inc. (NASDAQ:TSLA)’s SolarCity and Vivint Solar Inc (NYSE:VSLR) and outliving Sungevity and Verengo Solar, which went bankrupt, and NRG Home, which exited the solar business (all three were among the top players on the market). In the fourth quarter, the company installed 85 MW, up by 10% on the year and slightly lower than the company’s guidance of 87 MW. SolarCity installed 87 MW, but it includes commercial and industrial systems in addition to residential. For the full 2017, Sunrun reported 323 MW in new capacity, up by 15% compared to 2016 and this year it expects to add another 15%. In March, Bloomberg reported that Sunrun was seeking to get $500 million in financing for new installations.