SolarCity's Dominance Could Be Threatened in a Very Serious Way

SolarCity is the market-share leader in residential solar, but some big players are coming after its business.

Jan 19, 2014 at 1:43PM

SolarCity (NASDAQ:SCTY) has risen to dominance in the residential solar industry and built a $6 billion market cap in the process. It's done this by expanding more aggressively and offering innovative financing to customers than any other installer.

The company competes against mom-and-pop shops, multinational corporations, and everything in between in a very fragmented business. The challenge for SolarCity's continued growth is keeping the sales channel full of high value residential solar projects. If it can do that, the sky's the limit for the company. But as competitors emerge, I see a threat forming -- the biggest one SolarCity has faced yet.


Logo courtesy of SolarCity.

Competitors emerging
SolarCity has built an incredible 32% market share in the residential solar market, and outside of that, there's no one who has more than a 10% share. But there are an increasing number of large companies looking at getting into the business and they have the expertise and balance sheets that should concern SolarCity.

First, you have early movers in residential solar like Sunrun, Clean Power Finance, and SunPower (NASDAQ:SPWR), which provide financing and other services but work with dealers to do the actual installation. These are the immediate threat, but it's when utilities get involved that this business gets interesting.

The latest trend is for utilities to get into solar by forming a fund and then selling residential systems directly to customers. This is what Integrys Energy Group (NYSE:TEG) is doing with a fund it recently launched with Clean Power Finance's online platform. Integrys is providing the funding and the sales channel while Clean Power Finance provides bidding tools and installation partners to build the residential solar systems.

Integrys isn't the only utility looking into solar. Edison International (NYSE:EIX) and Duke Energy (NYSE:DUK) both invested equity in Clean Power Finance, along with two unnamed utilities. Utilities are also beginning to start funds similar to Integrys' to finance and sell solar projects, although they've remained largely silent so far. These are well-funded utilities with sales channels SolarCity doesn't have. They already have a point of contact with millions of customers around the country, and if they can figure out a way to sell residential solar effectively they could become huge competitors.


Rooftop installations done by SolarCity. Image courtesy of SolarCity.

SolarCity sees the challenge coming
Don't think SolarCity doesn't see the competition coming. There's a reason it offered to pay $120 million for Paramount Solar last year, adding essentially a telemarketing sales channel to its efforts. It also partnered with Home Depot to add a retail-sales channel and made the recent announcement that it will offer ways for individuals and small institutions to invest in solar. SolarCity is building as many sales channels as possible, hoping to reach customers before someone else does.

But SolarCity doesn't have a natural way to reach customers like a utility does, hence the door-to-door and phone-call sales. Utilities have a point of contact at least once a month when customers pay their bills, and they can offer solar without adding a new bill to pay. If utilities can leverage that contact to install solar on rooftops and in turn own the systems it'll be a significant competitor. 

The one thing that will keep utilities or other competitors from encroaching on SolarCity's business is having a national scale and product offerings (like the new online-investing marketplace) that a utility doesn't have, and that's why these strategic acquisitions have been made over the past year.

The biggest long-term threat
For now, there aren't many utilities, if any, who can efficiently compete with SolarCity in selling or installing solar. But remember that the utilities are just getting started, and California and Arizona account for a vast majority of solar installations right now, and that's where SolarCity has a huge head start. But the dynamic could change quickly as states like New York, Massachusetts, Texas, and others grow and utilities figure out ways to invest in solar.

Of course, there's no guarantee utilities will get solar right and take any share. Keep an eye on SolarCity's market share as well as how utilities attack the solar market in coming years to see if competitors are making inroads. If either market share or value per watt installed falls, it'll be a sign competition is heating up.

A hot stock for 2014
There's a huge difference between a good stock, and a stock that can make you rich. While SolarCity was the stock of 2013, The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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