Harnessing the Power of the Sun has Never Been Easier

For a stock that was hotter than the sun for most of 2013, the past week and a half has been colder than ice for SolarCity Corporation (NASDAQ: SCTY  ) . The reason I'm adding the Elon Musk-inspired solar leasing business to my Real Money portfolio is that I don't understand why Mr. Freeze has honed in on this particular target. All SolarCity has done recently is release positive news – aside from the allegations that it overstated the value of solar installations for tax break purposes. More on that in a second, but first, let me add the caveat that competitors such as First Solar (NASDAQ: FSLR  ) and SunPower (NASDAQ: SPWR  ) receive the same tax credits that for which SolarCity is coming under fire.

Coming to a neighborhood near you
Since the beginning of 2012, SolarCity has been emulating its photovoltaic panels by absorbing market share – rather than solar energy – in the residential solar space at a staggering pace. With data from the second quarter of 2013 providing the overall picture, 26.2% of the puzzle has been solved by SolarCity. Considering that its market share at the beginning of 2012 was only 12%, I'd consider this a fairly noteworthy achievement.

Controlling more than a quarter of the residential solar market might seem like SolarCity might be nearing its peak. That notion couldn't be further from the truth. 2013 is nearly over, and company estimates predict the deployment of 278 megawatts, or MW, for the entire calendar year – up 77% from 2012. Continuing to focus on the future, management confidently expects to install 71%-89% more capacity in 2014, guiding for a range of 475-525MW.

Now, I understand that management guidance can be written off as conjecture, but stop for a moment and take a look at the headlines SolarCity has been mentioned in lately. In the past few weeks alone, it has signed deals with major home builders in the sunbleached states of Florida and Texas to have its solar panels installed in the builders' future inventory. At the same time, it has announced that it will be expanding its footprint in California in the form of 10 new operation centers, placing a center within 30 miles of 90% of all Californians by the end of 2013.

Costs – not the sky – are falling
Even with less than 1% penetration of the entire electricity generating industry, SolarCity continues to see cost reductions ahead of schedule. Based on its latest quarter, its cost per watt is now 70% of what it was to begin 2012. Based on the current state of cost decline, CEO and co-founder, Lyndon Rive, is publicly bullish on maintaining this downward trajectory as solar power continues to acquire acreage in the overall U.S. energy landscape.

Financing in a blue ocean
Recurring cash flow is a staple of most debt securities. The predictable payouts give investors good reason to pony up sizable amounts of cash now, in return for the streaming, interest-bearing payments later. What SolarCity has recently opened the world's eyes to is that its solar leasing model fits this bill to the T.

In its trial run, SolarCity was able to raise $54.4 million by issuing "bonds" backed by its leased solar panels. This securitization was the first of its kind and had the backing of Standard & Poor's, which denoted an investment grade credit rating of BBB+. Over the next 13 years, investors will earn 4.8% on their upfront investment while SolarCity plans to put the funds to work almost immediately. Based on the excitement behind the freshly completed round, investors shouldn't be surprised if offerings such as these emerge from SolarCity on a quarterly basis.

Innocent until proven guilty
Recently, Senator Jeff Sessions from Alabama added congressional fuel to the kindling sparked by a Barron's article from August of this year. A bit of background on Alabama and the solar industry – it ranks 40th out of 50 states in terms of total solar grid capacity. Clearly, he has failed to witness similar benefits that top producing states such as California, New Jersey and Arizona have come to appreciate. Now, just because Alabama doesn't utilize solar power as much as it could, doesn't automatically discredit Senator Sessions' claims. No, the letter of law is likely to do a pretty good job of that.

Shortly after an SEC-mandated quiet period, SolarCity's management team posted a note addressing the allegations. After reading over the company's response, with direct references to Treasury Department and IRS guidelines being followed precisely, I am confident that the review process will absolve the company of any wrongdoing. That being said, should SolarCity be found guilty of inflating the fair value of its systems, it could face fines in the tens of millions of dollars. Fines at these levels would be particularly deflating for the company's recent success and for the price of outstanding shares.

Ready to harness the sun's power in my portfolio
To be certain, this decision has not been made lightly. For many months now, I have been on the fence when it comes to investing in the solar industry. It wasn't that I didn't believe in the idea, it was that I continued to find it difficult to pick a winner. After taking a much deeper dive, I am a believer in SolarCity's proven, albeit limited in history, success. It seems that, almost on a daily basis, new partnerships are being formed – e.g. with BMW and Tesla – or results come in well ahead of expectations. Following the recent 16% slide since November 14th, this appears as good a time as any to pick up some shares in anticipation of strong, future performance.

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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 November 27, 2013, at 3:24 PM, badkat7 wrote:

    For photovoltaic to become a viable source of alternate power requires a major breakthrough in pricing or efficiency. Neither is immediately likely. The problem is simple. A $20K system (the cost after rebates on my 7.2kW system in Arizona) has an operating lifespan of 25 years and the $5K inverters an expected lifespan of 10-15 years. So allowing for one change of inverter, we are looking at an investment of $25,000 up-front. So let's consider what happens if we put $25K into an investment account that makes a very modest 5% return per year. After 25 years compound interest would yield a value of over $67,000. But solar only clips about $1000 a year off our electric bill (which averages $4500 a year). So the most we'll get back from the system is about $20,000 plus some interest on the $1000 a year we are saving. Put simply, the system doesn't even come close to paying off the capital investment, far less the interest we would make on that capital if invested elsewhere!

    To make the situation worse, immoral and corrupt organizations like APS have declared they want solar users to cough up $50 - $100 a month for the privilege of owning a solar system. They have already succeeded in forcing solar users to pay $0.70 per kw of installed solar panels each month and are pressing for more. In fact APS think that not only should you make ZERO money every year, they want $200 a year over and above anything you might've saved off your bill! (12 x $100 that APS claims we should pay minus the dollar amount of electricity we generate which is $1000).

    Solar is dead because desperately wicked men in the Big Power companies (which includes BP, Exxon and many others) want to bury solar before it erodes their profits.

  • Report this Comment On November 27, 2013, at 7:35 PM, Rodney7777 wrote:

    The coming solar boom will be impossible to stop, this according to Ray Kurzweil, inventor, futurist and author, The percent of the worlds output of solar powered electricity right now sits at .075%. That may not sound like much, but Kurzweil's charts show that solar electric output has been doubling every 2 years for a long time. A little math says that 96% of the worlds electricity will come from solar by 2027. Clean, quiet, abundant, local, and no moving parts. Kurzweil can't be brushed off. His charts also predicted the world wide web as well. Like the internet, solar will come out of nowhere to be our main source of power. Best part is, long before 2027, nuclear and coal plants will be shut down. Also this means the end of oil drilling and refineries in spite of any plans of big oil to undercut solar.

  • Report this Comment On November 28, 2013, at 4:59 AM, bobbob1 wrote:

    Rodney7777

    A little math says that 96% of the worlds electricity will come from solar by 2027

    you must be on crack!

  • Report this Comment On November 28, 2013, at 10:58 AM, coloneltom1 wrote:

    Ugly solar panel farms take up huge tracts of land, have low output and only work when the sun shines., at night time they are useless and you cant use the land around them for anything else. The same with wind generators, they only work when the wind blows. The way to go are giant waterwheels, fed by hidden pipes from higher elevations. They are cheap to build and work 24/7 for hundreds of years with very little maintenance. Jobs will be created because these giant waterwheels will become tourist attractions, needing hotels, restaurants and shops. Its a win win situation for everybody. No wildlife disruption, no fish or bird kills. The borrowed water simply goes back into the river and on its way, meanwhile we all get lots of cheap electricity with no carbon footprint. We have the plans, we have the locations all we need is the funding to build the first one. Google World Wide energy for more info.

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