2 Reasons to Add Solarcity to Your Roth IRA

The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash-flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul.

SolarCity  (NASDAQ: SCTY  ) is this month's addition to the Pencils IRA Project. The stock does not look cheap by standard measures of valuation, but I expect this business to trade at a premium for many years to come. SolarCity is revolutionizing the field of energy delivery in the U.S., and it expects one day to expand beyond U.S. borders. Last month the company passed the milestone of 100,000 customers, and I believe it will add hundreds of thousands -- and, eventually, millions -- in the coming years.

1. Purpose-driven business
SolarCity's purpose, since its founding in 2006 by brothers Peter and Lyndon Rive, has been to make solar technology a more-available, widespread energy source. "SolarCity's mission has always been to help homeowners and businesses adopt clean power while saving on energy costs," explains CEO Lyndon Rive. The Rives are determined to demonstrate that people can help the planet and save money at the same time. 

In less than a decade, SolarCity has grown into the largest installer of residential solar systems, demonstrating the viability of solar energy as a mainstream energy source. Despite the company's early success and continued expansion, the Rives remain focused on their original goal.

"What's important is the mission," states Lyndon Rive. "If I wanted money, I would have cashed out a long time ago."

2. Innovative products and services
SolarCity's bread and butter is installing rooftop solar systems free of charge and selling the electricity at rates up to 15% lower than traditional utility rates. In essence, SolarCity offers "clean" energy to residential and commercial customers with no upfront cost and lower rates than consumers pay for "dirty" energy sources like coal and other fossil fuels. In addition to residential users and businesses, SolarCity's clients include colleges, school districts, local governments, and nonprofits.

Currently serving more than 100,000 customers in 14 states, SolarCity captures 32% of the residential solar-installer market in the U.S. (up from 17.4% in 2012). "The benefit of market share is it gives us more economies of scale," explains Lyndon Rive. "By getting more economies of scale, we can continue to invest in technology and services that will continue to separate us even further from our competitors and our value proposition to our customers."

Each SolarCity customer contract represents 20 years of consistent revenue for the business in the form of monthly electricity payments. The company's "nominal contract payments" -- the estimated future cash flows remaining on SolarCity's existing contracts -- have increased from $500 million in 2011 to about $2 billion in 2013.

In December 2013 SolarCity completed the acquisition of Zep Solar, a company dedicated to making solar installations more efficient and profitable for solar installers. As SolarCity continues to scale its business on a national level, achieving lower installation times and costs, it will widen its competitive moat. It's important to note that the cost of solar power has steadily decreased -- the cost of solar photovoltaic cells has decreased 99% since 1977 -- while the cost of generating electricity via fossil fuels has increased over the past two decades. As the Edison Electric Institute notes, "Customers inevitably will see these rising fuel costs that electric utilities must pay reflected in their electric bills." 

Foolish bottom line
Solar energy, and especially SolarCity, have a bright future (har har). The cost of providing solar energy has decreased, while the cost of providing fossil fuels has tended to increase over the long term. As these trends continue, and as SolarCity reduces its costs via scaling and acquiring businesses such as Zep Solar, SolarCity is poised to reward patient long-term investors with market-beating returns.

For these reasons, as well as the three remaining megagrower pillars that I will examine in my next article, I am excited to add SolarCity to the Pencils IRA Project.

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Read/Post Comments (10) | Recommend This Article (6)

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 April 10, 2014, at 9:11 PM, ronwiserinvestor wrote:

    Add SolarCity to your Roth? That a good one. With a solar lease or PPA, the homeowner has to forfeit the opportunity to collect the 30% federal tax credit worth up to $10,000 on a 6 kW solar system at the PPA company's much higher pricing. The homeowner also gives up any cash rebate or other incentives and as you've seen $3,000 is not $0 down!

    A $0 down solar PPA or lease will typically cost the consumer up to 3 times more than the price to purchase a system. Don't believe it? Well it's simple math. Add up the 20 years worth of lease payment on a typical 4.7kW leased system and you'll find that the system will cost you about $28,080. Purchase the same 4.7kW system and apply the 30% federal tax credit and that same system will cost you about $9,642. So $28,080 to lease (rent) or $9,642 to own.

    So who's really paying for the repairs, insurance and monitoring on the leased system? Well, I'll give you a clue; it's not the leasing company. It's you!

    And good luck ever selling your home with a solar lease or PPA attached to it. What potential home buyer will want to assume your PPA payments on that used solar system, when they can buy a brand new solar system and keep all of the financial incentives for tens of thousands of dollars less than your remaining lease payments?

  • Report this Comment On April 11, 2014, at 3:10 AM, Doresdb21 wrote:

    Hey Ron, did you spend $30k to buy a solar system? If you did, you're a dummy. You could have invested that money elsewhere and made a better return.

    The smart move is having a solar system installed for zero cost and buying the electricity at a much cheaper rate than what your utility charges.

    SolarCity has figured out a brilliant way to help the world become a cleaner and better world, all whole saving customers money.

    But, hey, some people like Ron may want to continue to pay more to get dirty power from finite resources... I'm sure your kids appreciate that

  • Report this Comment On April 11, 2014, at 3:26 AM, ronwiserinvestor wrote:

    That's a laugh! You're not going to spend $30,000 on a solar system unless you're leasing one. An average sized 4.75kW system will cost you less than $10,000 if you buy it or about $28,080 if you lease it. So don't get

    fleeced by a solar lease.

  • Report this Comment On April 11, 2014, at 3:31 AM, ronwiserinvestor wrote:

    Doresdb21 another solar lease Zombie trying to confuse the consumer with that Voodoo solar lease nonsense.

  • Report this Comment On April 11, 2014, at 5:09 PM, Doresdb21 wrote:

    haha! I am no zombie ron, but you are obviously the typical troll/scum of the earth!

    Yeah, lets really talk bad about a company that is helping hundreds of thousands of us citizens get away from dirty power from the utility companies.... not to mention has put thousands of Americans back to work in a down economy.

    Figure it out!

  • Report this Comment On April 11, 2014, at 5:53 PM, oTeslaManiax wrote:

    Definitely Ron does point out all the tax incentives and net metering advantages with getting a solar panel. And yes Solarcity does take all that incentives from the home owner and put it in their pockets. And plus more because they can claim more tax incentives and deprecation because they are a business. That's exactly why people invest in Solarcity. Buy or lease is really the homeowner's decision. If you intend to live in your home for 20 years than buy and get all the incentives and savings for yourself. But if you don't intend to live there forever in your adult life, than lease. You still get some savings and it costed you nothing. You can use that money to invest, travel, buy other things. One is not better than the other. It is really a personal decision. The fact is the average number of years a homeowner will stay in the home is 10 years. At the current price for panels, owning is not a good investment for most people. Without the government incentives, no one would adopt solar.

  • Report this Comment On April 12, 2014, at 1:17 PM, longislandpress wrote:

    Ya' know boys without govt incentives and We the People UNDERWRITING the liability insurance Nuclear doesn't work either!!! By the way - whos paying for the decommissioning costs and storage of the "HOT" nuclear fuel. Solar is the way to go irregardless of the owning/NOT owning incentives vs not incentives arguements.

    We need to manyfacture those panels HERE and BAN dumping - with a vengence!!!

  • Report this Comment On April 13, 2014, at 5:04 PM, TMFDukenewkirk wrote:

    Ron does bring up an interesting point I haven't seen addressed here yet. If you are leasing, will it not be an issue selling a home with the lease attached? Will the property not be encumbered by said lease?

  • Report this Comment On April 13, 2014, at 5:11 PM, TMFDukenewkirk wrote:

    P.S.

    To Ron's other point, however, that leasing is not a cost efficient option for the consumer in no way interferes with the potential success of this investment. Our capitalist world is based on just that kind of spending. Getting in bed with SolarCity in this case is simply and quite likely hitching your wagon to who's going to profit most in this industry.

    Cars, houses, anything expensive is most commonly financed. Though granted, cars are money pits through and through, financing a house puts some otherwise rent money in your own asset column eventually, so too can savings on energy use. Certainly worse things to finance than Solar. Seems pretty easy to justify for the average consumer.

    Ron and my dad will buy cash and laugh all the way to the bank, fair enough.

  • Report this Comment On April 15, 2014, at 3:12 AM, ronwiserinvestor wrote:

    Yea right ! Helping hundreds of thousands of citizens to get away from dirty power at three times the cost that they would have paid if they bought their system instead. Real nice of them!

    Why so much drama Doresdb21 ? Did ya lose some money in the stock market? Well you haven't seen nothing yet! Koolaid drinking fool!

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