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Summary While NRG Energy’s conventional fossil fuel business continues to underperform, the company’s renewable business is more promising than ever. NRG Energy’s distributed solar business is growing at a rapid pace and should be a huge growth engine for the company moving forward. NRG Energy’s diversified energy portfolio should provide the company with unique advantages. The turbulent energy commodities market will likely continue to pose challenges for NRG Energy in the near-term. NRG Energy (NYSE: NRG ) clearly believes in the potential of clean energy as it has put a large emphasis on solar PV. Despite this, the majority of the company’s business is still based on conventional generation(i.e. fossil fuels), which commands ~70% of the company’s capital allocation. NRG Energy largely disappointed during its Q2 due to the underperformance in its conventional generation business, which is not so surprising given the turmoil in the energy markets. Despite the fact that the company missed on both EPS and revenue, which came in at $0.06 and $3.4B respectively, the company still has much to look forward to. Renewables currently receives ~30% of NRG Energy’s capital allocation, which is a figure that is bound to skyrocket moving forward. Although conventional generation still makes up for most of NRG Energy’s business, the company is making a rapid and smart transition to solar PV. During the Q2 earnings call, the company gave much more insight into how important it thinks solar will become. In fact, CEO David Crane even stated that “The future is going to be increasingly solar-powered and increasingly distributed.” This optimism surrounding solar PV will likely propel NRG Energy past its competitors moving forward. Ramping Up Distributed Solar PV Operations NRG Energy has put a heavy emphasis on developing its distributed solar PV business. As this is perhaps the most promising solar PV segment in the U.S., NRG Energy is definitely on the right path. During Q2, the company’s bookings nearly doubled on a YOY basis, recording 90% higher bookings. This translates into 19,410 NRG Home Solar customers as of Q2, which shows that the company is clearly building a respectable distributed solar infrastructure. Even more impressive, the company has maintained ~20% QOQ since the end of 2014. Such a promising distributed solar business places NRG Energy among the top distributed solar providers. NRG Energy still has enormous growth ahead of it as the company has barely scratched the surface of the home solar market. As the company is one of the first conventional energy companies to make a large-scale transition to solar, it has a meaningful first mover’s advantage. Not surprisingly, NRG Energy is rapidly climbing the ranks of top rooftop solar providers, even challenging the likes of Vivint Solar (NYSE: VSLR ) and Sunrun (NASDAQ: RUN ). Given that NRG Energy also has the advantage of maintaining a conventional energy business that could provide base-load generation for intermittent renewable energy sources, the company has an advantage over pure-play rooftop solar companies. Diversified Business While NRG Energy is putting a clear focus on distributed solar PV, the company is nonetheless diversified across the energy sector. This means that no matter how the future turns out, NRG Energy should be well-prepared. The company has assets ranging from wind and solar all the way to oil and gas, making it one of the most diversified energy companies in existence. As was previously stated, having both renewables and fossil fuels assets is advantageous in that fossil fuels can provide renewables with base-load generation. As renewables like wind and solar still do not have a cost-effective means of storing energy, fossil fuel assets certainly come in handy. NRG Energy is an extremely diversified energy company, with assets in nearly all the major energy markets. (click to enlarge) Source: NRG Energy Obstacles NRG Energy has all the tools to become a powerhouse in the renewable arena. While NRG Energy’s renewable prospects are looking bright, the company’s conventional business will likely continue to face some volatility and difficulties in the near-term. Given the instability in the energy markets, NRG Energy will likely continue to face difficulties moving forward. The company has seen its valuation decrease by approximately 50% over the past year alone. In the long-run however, NRG Energy is well-positioned to outperform the market. The company will also face increasingly stiff competition from the distributed solar pure plays, mainly from standout SolarCity (NASDAQ: SCTY ). While NRG Energy is indeed has an early mover’s advantage in the distributed solar industry, SolarCity is already building an unparalleled brand presence. Given that brand presence in this arena is much more important than many had expected, NRG Energy will have to make its own imprint on the market soon or risk losing market share. Given NRG Energy’s vast resources and growing infrastructure, the company is more than capable of doing this. Conclusion NRG Energy has much more room to grow at a valuation of $5.9B . While the challenging commodity market will likely continue to plague NRG Energy in the near-term, the company is making all the right moves to secure a dominant role in the long-term future. NRG Energy’s home solar business will likely push the company to greater heights, especially given how fast the distributed solar industry is growing. As the company is at the forefront of the current energy transition, it will likely reap enormous rewards as a result. Despite NRG Energy’s underperformance over the last year, the company should outperform expectations in the years to come. Disclosure: I am/we are long SCTY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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