SolarCity (NASDAQ:SCTY) reports earnings on Wednesday after the market closes and it's an important report for the company that had the hottest stock in solar until after its last quarterly report.
There will be a few keys for investors to watch and they'll determine which direction the stock goes for the rest of the year.
The first thing I'll be looking for is installation guidance for the rest of this year. Management has stuck to its 475 MW to 525 MW guidance for 2014 and with just 78-82 MW expected to be installed in the first quarter, there will need to be a lot of growth in the back half of the year.
Growing installations is one of the two major levers SolarCity can pull to increase value for shareholders and its stock price so falling short of guidance could be devastating while exceeding it could cause the stock to pop.
Until now, SolarCity has grown in residential solar without too much competition. A few smaller suppliers have competed, but on a national level no one can compete with SolarCity's scale.
But that's changing as SunPower (NASDAQ:SPWR) grows its residential business, Sunrun enters the installation business, RGS Energy grows, and NRG Energy gets into installing residential solar. Before long, I think we'll have five to 10 very strong solar installers and they'll be forced to compete on price because the difference between one installation and another isn't significant. After all, most of these companies use a lot of the same components.
SolarCity reports both retained value it has added during the quarter and retained value per watt. Last quarter, retained value per watt was $1.90 and like installations, if that falls, it's a sign of increased competition, and if it pops, so could the stock. This is the other major lever SolarCity has at its disposal so this will be a key stat.
Cash vs. lease
Beneath the headlines, I'll be watching very closely how the residential solar market is looking at leases versus cash sales. Last quarter, SolarCity sold a lot more systems than it expected, which adds less value to the company than holding leases that approach $2 in value per watt. If that trend continues, it changes the value proposition long term.
SunPower reported that in the first quarter 24 MW of the 35 MW of residential solar it installed was through cash sales and management said educated customers are starting to realize that cash sales are more advantageous in the long term.
Keep a close eye on SolarCity
SolarCity's $5 billion market cap on just $163.8 million in revenue last year means there's high expectations for growth and value creation per watt installed. I'm cautious on SolarCity simply because I think the future will force the company to compete on price more than it has in the past. This quarter will give some clues as to whether that's true.
Keep an eye on installation guidance, retained value per watt, and the cash/lease mix because how these factors are trending will tell us where the company and stock are headed.
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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 and 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.