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Put Your Money Where Your Roof Is

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.

Why SolarCity?
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.


Vertical integration

Strong balance sheet

Long term (20 years) customer relationship

Elon Musk part of the team


Lack of proprietary technology

Limited coverage nationwide

Negative 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


Closing remarks
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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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2013, at 10:11 AM, tchams wrote:

    Is solar an efficient choice for those who have winters with a lot of snow and cold. The cold should not effect the panels but I am not sure how ice build up works with these. Does anyone have any insight into this as this may hinder the growth of solar use by individuals in the future in these areas?

  • Report this Comment On October 29, 2013, at 4:04 PM, jeffhre wrote:

    tchams, ironically, high heat makes them less efficient.

    They are dark in color to absorb solar gain, angled to let objects slide off easily, and covered with smooth glass panels. If you get panels without a metal lip or raised edge...even better. Since the prices went down rapidly a few years back, are in high demand in Colorado. Folks tell me Colorado gets a lot of snow, but is also a very sunny place?????

  • Report this Comment On October 29, 2013, at 10:51 PM, ronwiserinvestor wrote:

    Leasing a solar system is absolutely NOT a cost save option when compared to purchasing a solar system at today's much, much lower pricing. The solar leasing companies typically charge at least double what you can purchase a system for. About $6.00 a watt for a leased system and less than $3.00 a watt for a purchased system.

    And to make matters far worse, the leasing and PPA companies will take your 30% federal tax credit worth about $10,000.00 on an average sized 6kW system. They'll also take any cash rebate. That money would go into your pocket if you purchased your system instead.

    And to add insult to injury. lease and PPA payments are not tax deductible. And good luck ever selling your home with a solar lease attached to it, what homebuyer will want to assume your remaining lease payments on a used solar system when they can buy a brand new solar system and keep the 30% federal tax credit for tens of thousands less.

    If you really want to save money, get an FHA $0 down solar loan with tax deductible interest instead and keep all of your incentives and own your solar system for a much better return on your investment.

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