SolarCity's Growth Binge Continues

It's not easy being a solar company these days. Beating earnings estimates and growing your business isn't enough to keep the market happy, something SolarCity (NASDAQ: SCTY  ) is learning today. Megawatts deployed jumped 144% from a year ago to 53 MW and lease revenue was up 78.8% to $20.6 million. The company did lose $23.9 million, or $0.31 per share, in the quarter but that's to be expected due to the upfront costs that go into generating lease customers.

What investors should be concerned with is the growth in contracted payments and retained value. Contracted payments are the payments leasing customers will pay over the course of 20 years, and retained value is the present value of the cash flows of those leases. Contracted payments rose 15% in the quarter to $1.4 billion, and retained value was estimated at $1.27 per watt, or $662 million overall.  

The leasing market continues to be strong, something we heard from competitor SunPower (NASDAQ: SPWR  ) as well. Based on SolarCity's numbers, leases are growing while system sales are falling. That will have the effect of lowering revenue and earnings in the short term, but it will increase both in the long term. The trend toward leases is something that's been predicted by most executives in the industry for at least a year. When a customer is faced with a decision to buy a system outright or pay with no money down and energy savings over 20 years, the decision is fairly easy for most homeowners.  

Cost trajectory is also on the right path. According to SolarCity, costs were down about 18% year over year, a key to making solar competitive in more markets. That already puts it ahead of its year-end plan.

The other key is that MW booked reached 69 MW, higher than the 53 MW installed, and will continue to fuel growth.

Foolish bottom line
SolarCity's stock may be down today but the company continues to execute on its planned growth in residential solar. Installations are growing at a rapid pace and eventually that will lead to solid bottom-line growth.

My only concern is that the company is worth $3.2 billion right now but only has $662 million in residual value to collect over the next 20 years. That prices in a lot of growth and the residual value calculation makes a lot of assumptions that may not be true in 20 years. Keep an eye on growth because, if it slows, there's significant downside with a market cap that big.

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