In mid-June, there were rumors that residential solar unicorn Sunnova planned to IPO. On June 27th, the company confirmed the rumors by submitting a pre-IPO prospectus to the SEC. As Sunnova becomes the first residential solar company to IPO in years, investor interest is piqued. But as the space tapers off, the company’s future is unclear.

Major roadblocks could bar the company from both a successful IPO and in the long run, growth opportunities that its competitors took advantage of in different times. At the same time, Sunnova’s (relatively) unique business model may help it overcome its challenges. Either way, investors should pay attention to the company as it approaches its initial public offering.

Sunnova Lacks Geographical and Installation Diversity

As Sunnova continues its mission to bring ubiquity to residential solar, what it needs is geographic diversity. That is, it needs consumers from at least around the United States to truly make residential solar more popular.

Currently, over half of its installations are in California and New Jersey, serving 26% and 29% of its units to the respective states. An additional 14% of its installations have been made in Puerto Rico. Though an interesting choice granted Puerto Rico ups its renewable energy efforts, the territory makes it true that over two-thirds of Sunnova’s installations have been done in just three regions.

Hence, it’s no surprise that Sunnova has only penetrated 3% of the national residential solar market. State-specifically, the company has reached 15% of the California market and 5% of the New Jersey market.

So far, Sunnova has only penetrated 3% of the national residential solar market.

But Sunnova’s lack of diversity isn’t just geographic; it does over half of its installations with one installer, namely Trinity Solar. Though these issues are widely considered pain-points for Sunnova, the company believes they corroborate its high growth potential. The question is, how fast can Sunnova reach a critical mass of customers nationally before its prime competitor, Sunrun, eclipses it entirely.

Sunnova Not Yet Profitable, But It’s Getting There

Beyond its geographical and installation diversity qualms, Sunnova has a more fundamental problem common to unicorn companies these days: it isn’t profitable. For at least 9 of the last 10 quarters, the company has reported operating losses ahead of its IPO.

Though its cash woes are a cause for concern, Sunrun’s economic situation isn’t unique to the solar industry either. And it’s not the end all be all either. Actually, it’s quite common for companies in the space to reinvest earnings in growth in lieu of immediate profitability.

After all, Vivint, one of Sunnova’s publically-traded competitors, isn’t profitable either. Sunrun, on the other hand, is. The question that investors must ask is, as it relates to the level of risk they’re willing to take on, when will Sunnova’s chance at profitability come?

Positive Potential for Sunnova

The reason investors could potentially be optimistic about an upcoming Sunnova IPO is the company’s unique positioning as it comes to loans. Since 2018, loans have been the residential solar space’s primary financing method. And Sunnova’s offerings in power-purchase agreements and loan options for consumers give it an advantage here.

Since 2018, loans have been the residential solar space’s primary financing method. Source: Wood Mackenzie Power & Renewables

In part, its financing position has allowed the company to increase revenue and reduce net loss. As Sunnova continues to have a much lower overhead compared to Sunrun and Vivint, it is on track to continue reducing net loss. This means profitability might not be too far away.

Conclusions

With risks and challenges ahead, Sunnova’s IPO performance is largely in the air. Though the residential solar industry boomed between 2012 and 2015, 2019 isn’t quite the same, as the space tapered off. Will Sunnova be able to get ahead of the curve in the next boom? Who knows, but either way, investors should pay attention.