SolarCity (NASDAQ: SCTY ) is a leader in rooftop solar that offers 20 year "solar-as-a-service" contracts with low-cost, fixed rate electricity. Any homeowner, business, government facility, or non-profit organization with sunshine on the roof can benefit from solar power and take advantage of lower electricity rates.
Why rooftop solar?
Rooftop solar is clean, renewable, and easy to connect to the grid. Electricity is delivered at below $0.16/kWh in target markets, well below utility rates that can exceed $0.25/kWh in states like California, Nevada, and Arizona.
This investment is for the long term
SolarCity maintains a 20% market share of installations and has 75,000 customers; the company plans to target 1 million customers by 2018. A JPMorgan study estimates the company will have a retained value of $13 billion, representing $98 a share. With a current market cap of around $4 billion, current share prices are sitting at a significant discount given the projected retained value. Retained value is arguably the most appropriate way to value this stock since it provides a present value of future cash flows on a net basis as opposed to other metrics such as earnings, which are limited to a specific period.
Rooftop solar contributes less than 0.1% of US electricity today. Investors with a much longer time frame could benefit from the fact that by 2030 rooftop solar could contribute 3.5% of US electricity, with this number reaching 6% by 2050.
SolarCity offers a no-upfront-cost solar system that reduces the homeowner's or business building's utility bill. While competition in the industry is fierce, SolarCity is vertically integrated, with functions spanning financing, engineering, installation, monitoring, and maintenance.
Cash flow is an important aspect of the company's business. SolarCity generates a predictable, long-term cash flow stream from each new contract deployed over a 20 year period. As such, total cash flow has been trending higher and the company has expressed confidence in achieving a sustainable positive cash flow beginning in the fourth quarter 2013.
One of the greatest advantages SolarCity maintains is its channel strategy. The company has achieved a sustainable competitive advantage due to the rapid development of a large national sales and distribution strategy. The recent acquisition of Paramount, and more importantly a partnership with Home Depot (NYSE: HD ) gives the company a growing presence that would be impossible to achieve otherwise. SolarCity is present in 450 Home Depot locations. As Home Depot continues to see increased foot traffic due to a continued housing recovery, SolarCity will have greater access to potential customers. Naturally, as the solar industry continues to experience tremendous growth, customers should flock to Home Depot to inquire about SolarCity products. SolarCity pays Home Depot a fee per customer that is signed up instead of paying rent. During an interview with Fortune's Adam Lashinsky, CEO Lyndon Rive best exemplified the importance of a Home Depot partnership.
Adam Lashinsky: An important part of your sales process is through Home Depot. Can you explain that?
Lyndon Rive: Yeah. We have a fantastic relationship with Home Depot. Someone might go to Home Depot to buy dirt, and they'd speak to one of our solar consultants. And the solar consultant explains to the person, "Hey, you can get a solar system for free and pay less for the electricity." People struggle with that concept. What do you mean? What's the investment? What's the payback? No, no, no. It's free, and you pay less for the electricity.
Powering more than just houses
SolarCity designs and installs electric vehicle charging systems and currently maintains over 2,500 stations. Charging stations are compatible with Chevy Volt, Nissan Leaf, BMW, and Tesla (NASDAQ: TSLA ) , which is run by SolarCity Chairman (and cousin to the CEO) Elon Musk. SolarCity not only benefits from having perhaps Wall Street's greatest darling as part of the team, but will play a vital role in the future of electric vehicles.
Tesla and SolarCity are naturally joined at the hip as the company will provide charging stations for Tesla and other electric vehicles. Charging stations are popping up all over North America, and will continue doing so in anticipation of Tesla's Gen III vehicle, which could potentially be reasonably priced in the $35,000- $45,000 range. Analysts at Wedbush have raised their 2017 estimates forecasting 150,000 Gen III units, and longer term the Gen III car could be a 300,000-500,000 unit product. SolarCity will be powering hundreds of thousands of Tesla vehicles for years to come as SolarCity charging stations will cover about 98% of the U.S populations and certain parts of Canada by 2015.
Strong balance sheet
Long term (20 years) customer relationship
Elon Musk part of the team
Lack of proprietary technology
Limited coverage nationwideNegative perception of "green" technology
Domestic and international growth
Expansion of retail partners (i.e Wal-Mart)
Favorable political and economic incentives
Up-sell additional services
Potential competition from utilities
Scheduled reduction of tax credits / incentives
Saying that SolarCity is a "sure thing" might not be fully truthful. The company has tremendous advantages, but also faces some risks, as illustrated above.
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