Can SolarCity Corp Secure Its Bottom Line?

The solar industry has become a highly competitive place with a number of major players competing for market share. Downstream solar companies have more flexibility to adapt to changing market trends because they have less capital trapped in manufacturing. However, this also increases their reliance on Chinese suppliers, which have relatively lower quality products. SolarCity (NASDAQ: SCTY  )  has been using this flexibility to increase its revenue, but at the expense of its bottom line.

The business
SolarCity does not produce its own solar panels. Instead it designs and installs solar systems and sells or leases them to individual consumers and enterprises. So the company is known as a downstream solar business. 

Downstream businesses have the ability to generate more margins than panel manufactures. SolarCity generates almost an equal amount of revenue from operating leases and system sales. Asset securitization and a downstream business model are both positive aspects. However, investors must also keep an eye on the company's financial performance and the technology of its suppliers.

Revenue
The company generated revenue of $63.5 million in the first quarter of 2014. This translates to 112% growth in comparison to the same quarter last year. This growth was supported primarily by revenue from operating leases, which was up 93% due to an increase in its operating lease MW deployed.

 

Source: solarcity.com.

The asset securitization model, channeling funds from investors to rooftop solar deployment at a lower cost of capital, is proving promising for the company. The consumer does not have to purchase the system and pays on a monthly basis, hence the increased MW booking. SolarCity has booked around 136 MW this current quarter, up by 34% on a sequential basis. Operating leases are quite beneficial for the company at a 45% margin, and the growth of this business can help it return to profitability in the next few years. However there is one problematic trend.

 

Source: solarcity.com.

As you can see, the solar energy systems segment grew to take a larger share this quarter. This is just a 5% margin segment and has a minimal impact on the bottom line. The company is not going to return to profitability until either its margin in this segment improves or it increases the share of leases going forward. The good news is that due to asset securitization, the lease segment is also gaining traction. Improvement in this segment can go a long way in improving the bottom line and strengthening the financial position of SolarCity.

Cost management
SolarCity is making efforts to reduce its costs. Fixed costs per watt are following a downward trend and OPEX per watt is also decreasing. These costs will come down further due to economies of scale as the MW deployed are expected to increase in the future.

 

 

Source: solarcity.com

The chart above indicates that volume should be increased in order to reduce costs, and in turn, gain profitability. SolarCity is guiding for 900-1,000 MW for the year 2015. Hence, the loss position of the company is expected to improve in the coming years.

Future prospects
Most importantly, the securitization model is expected to spur growth and enable SolarCity to deploy more MW in the future.

 

Source: solarcity.com.

However, competitors with differentiated products like SunPower (NASDAQ: SPWR  )  will restrict SolarCity's leased solar system margins. SunPower is also pursuing a leasing business model in the residential market and competes with SolarCity.

The problem with SolarCity is that it uses panels from suppliers like Yingli Green Energy, and this involves a cost risk -- i.e. if the supplier increases prices. SunPower, on the other hand, produces panels in-house and has more control over the pricing. Moreover, SunPower's panels are more differentiated than Yingli's.

The significant challenge for SolarCity is to provide off-grid electricity. This will be done through deploying Tesla Motor batteries, but this will not be a cost-effective solution because of the cost associated with the batteries. Industry insiders put a cost of $1,000/ KWh on a battery, and home battery backup would cost around $25,000, which is almost equal to the cost of the solar system itself. On the other hand, SunPower is planning on launching its own energy storage solution, and this will put more pressure on SolarCity to drive down costs. Battery storage is not a feasible option as of now; cost and size barriers must be overcome in order to provide an attractive alternative to conventional utility supply at night.

Bottom line
Solar demand is on the rise and companies with downstream solar businesses are expected to benefit the most. SolarCity is a downstream solar business and by that logic it should end up on the winning side. But the company has been posting consistent losses and is expected to continue this trend for the next year or so.

Asset securitization and the rooftop market hold promise, but the current deployment of around 500 MW is not enough to help its quest for profitability. SolarCity has to increase volume in order to spur profitability. The company is facing headwinds, but the game is not over yet as it is gaining some serious traction in the residential lease market.

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Read/Post Comments (14) | Recommend This Article (7)

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 June 02, 2014, at 11:59 AM, ronwiserinvestor wrote:

    Our company has already been notified of price increases by several Chinese solar manufacturers with warnings of more price increases coming done the pipeline due to the new impending tariffs.

    Because we sell higher performance products from U.S. and Japanese manufacturers, as pricing from the Chinese manufacturers trend upward, this will place us in an even better position when competing with higher priced dealers like SolarCity that offer Chinese made products.

  • Report this Comment On June 03, 2014, at 11:55 AM, Waldo wrote:

    So ronwiser, is your company Solar World, the company that cried to the government that you couldn't compete on the open market. Don't worry, Solar City will be just fine. Tariffs or no tariffs. Their biggest supplier just opened a manufacturing plant of their own that will keep the cost of the panels low, even with the tariff. If you can't compete on the world stage, get out of the business.

  • Report this Comment On June 03, 2014, at 12:05 PM, Garn333 wrote:

    "The significant challenge for SolarCity is to provide off-grid electricity" - "On the other hand, SunPower is planning on launching its own energy storage solution"

    And just what is SunPower's "plan" to do this, magic dust? I'm going to assume their "energy storage solution" will most likely come in the form of batteries, the same as for Solarcity. And where might both of these companies end up purchasing their batteries from... Tesla? Who do you believe will get a better price on said batteries if that is the case?

    BTW, hello Ron, see you are still out trying to knock Solarcity every chance you get.

  • Report this Comment On June 03, 2014, at 12:49 PM, ronwiserinvestor wrote:

    @Waldo, No, we're we're not SolarWorld. We offer higher performance U.S. made products than both SolarWorld and SolarCity, at a much lower price. When it comes to real world performance, according to the California Energy Commission and other states. A solar panel's PTC rating matters most.

    A solar panel's temperature coefficient is also critical because the hotter it gets, the poorer the solar panel's performance. And when it comes to both of these two critical performance metrics, the U.S. made product that we offer beats SolarWorld and SolarCity and even many of SunPowers offerings at a much better price.

    And you're dreaming Waldo, if you think that SolarCity or any company for that matter can skirt the tariffs that have been applied to the Chinese manufacturers. Even moving their manufacturing facilities in different countries didn't work, as now, even those solar panels will be subject to tariffs.

    BTW. Hello Garn333, When you've got a better product at a much better price, you flaunt it.

  • Report this Comment On June 03, 2014, at 12:49 PM, LotsofFunk wrote:

    "Industry insiders put a cost of $1,000/ KWh on a battery, and home battery backup would cost around $25,000, which is almost equal to the cost of the solar system itself. "

    Please cite one source for the "facts" about the cost of a battery that you included in this paragraph.

    According to many sources, the cost for Tesla's.

    batteries is ~$150/KWh and Tesla's Gigafactory could result in it falling to less than $100/KWh.

    http://cleantechnica.com/2014/01/07/ev-battery-prices-much-l...

  • Report this Comment On June 03, 2014, at 2:50 PM, ronwiserinvestor wrote:

    @LotsofFunk, Depending on where the batteries are sourced Chinese cells versus Japanese/U.S. made. Retail cost (cost to the consumer) runs between $600 to $1,000 per kilowatt hour today for a complete Li-ion battery pack with BMS and BOS of battery pack components. (not including solar modules, charger or inverter.)

    Wholesale cost of the individual battery cells prior to assembly into a battery pack without BMS and BOS of battery pack components (cells only) may run $150/kWh to $200/kWh for Tesla (which I highly doubt) but that's wholesale cost to the battery pack assembler, not the cost to the consumer.

    If fully assembled Li-ion battery packs only cost $150/kWh then that would put the pricing on par with sealed AGM lead acid technology and every dealer on the planet including us, offgridsolar .com would be on top of it and nearly every solar system in the U.S would be sold as a battery backup grid tie solar system.

    So this authors statement regarding $1,000 per kilowatt hour is probably accurate.

  • Report this Comment On June 03, 2014, at 5:39 PM, yogert909 wrote:

    Ron, Every other comment about SCTY (on multiple websites) is one of yours. You must have some significant down time between installing solar panels. Maybe you should get a part time job or go fishing and get some fresh air?

  • Report this Comment On June 03, 2014, at 7:03 PM, ronwiserinvestor wrote:

    @yogert909 we don't do installations. We're a wholesale distributor that sells directly to homeowners and contractors at wholesale pricing levels. We have a team of nationwide installers that perform the installations for us which explains why the combined pricing (materials and labor) is so much lower than SolarCity and Sunpower's pricing.

    We handle all of the marketing, sales, design, permit prep work, tech support and warehousing of the materials in house and then ship the entire system to the customer's site where our installers perform the installation. We will soon be offering franchises nationwide. Who knows, maybe someday we'll even go public just like SolarCity. From the tip of Florida to Hawaii, we've been doing the same thing for over 16 years. The model works very well.

    About 30% of our customers are self installs. We provide the materials and the in-depth technical support needed to complete the installation and our DIY customers save even more money. Self installed systems typically run as low as $1.69 per watt, which no solar lease/PPA company on the planet can touch.

    You are right though about fishing and some fresh air. I could sure use some of that right now.

  • Report this Comment On June 03, 2014, at 10:32 PM, ronwiserinvestor wrote:

    How will today's commerce department's preliminary decision impact pricing on SolarCity's and other dealer's use of Chinese solar modules:

    http://www.marketwatch.com/story/solarworld-applauds-commerc...

  • Report this Comment On June 04, 2014, at 10:02 AM, BroadwayDan wrote:

    New business idea: Trollar Energy, make the same points endlessly to spread as much FUD as possible about one Solar company and their business model..

  • Report this Comment On June 04, 2014, at 11:12 AM, Garn333 wrote:

    That ROCKS BroadwayDan! :)

    I needed a good laugh. We can always count on Ron to do his advertising in the comment section of any and all Solarcity articles instead of paying for it, by say maybe a Groupon deal like some other Solar company just did.

    If I was a customer looking for a solar solution I don't think I would choose one that is consistently out bashing their competition. Maybe that is just me...

  • Report this Comment On June 04, 2014, at 12:32 PM, ronwiserinvestor wrote:

    Wow, That sounds like an incredible marketing technique. Advertise your business without mentioning its name, website/email address or phone number. Maybe Garn333 and BroadwayDan can fill me in on how that works.

    The reality is that the solar lease and PPA business model is being brought down by a couple of important changes to the market.

    1. The availability of $0 down FHA solar loans and $0 down PACE solar financing that offer tax deductible interest. PACE financing allows homeowners to repay their financing through their property tax payments. (solar leases and PPAs don't offer tax deductible interest.) Both the $0 down FHA solar loans and $0 down PACE financing allow the homeowner to keep the 30% federal tax credit while solar leases and PPAs do not.

    2. The availability of now lower priced, high performance, high quality U.S. and Japanese made solar modules that are offered by many competitors versus the leasing/PPA company's Chinese products that are once again being impacted by new tariffs that will result in much higher pricing for the Chinese products. Higer priced Chinese VS low priced U.S. and Japanese made, I wonder who will win that battle for the consumer.

    Summary: Lower priced U.S. and Japanese made solar modules coupled with $0 down solar loans with tax deductible interest has made the outdated solar lease and PPA financing models obsolete.

    For most working consumers, there are now no advantages to signing a 20 year solar lease or PPA contract when compared to a system ownership. Leases and PPAs might have made sense two years ago when prices were higher and there were no other forms of financing available but in 2014 all that has changed.

    The 2014 first quarter successes that were enjoyed by the leasing companies were primarily due to momentum from prior years. That momentum will slow and will soon come to a stop as more and more consumers learn of the better alternatives that are available today.

    Garn333 and BroadwayDan. All I have presented here is my opinions which are based on 16 years of experience in the PV industry. I am not bashing any particular company. Investors and consumers can take the information that I present here or they can leave it. It's all about being fair and balanced. There's always two side to every story.

  • Report this Comment On June 04, 2014, at 4:11 PM, Garn333 wrote:

    Ron, so your motive it just to be a really nice guy and share you 16 years of experience with everyone here? That is very thoughtful of you. And not only here but on every other article, on every other web site, that speaks about Solarcity, in particular. Your kindness is unquestionable. A heart of gold I tell you. (I’m pretty sure the reason you don’t mention your website/email or phone number is because you know you would be banned from posting/commenting on these sites for breaking their rules. Otherwise I have the sneaky suspicion you would if you could. To directly answer your question about mine and BroadwayDans’ “incredible marketing technique”, I would follow the advice and direction of two other well-known guys posting on Solarcity, Ray Boggs and…. what was his name… H-Bridge I believe. I think you might know them (Pretty sure you do). They both seem to use the exact same style, and mostly in the same comment sections as you.

    Ron, I’m not even arguing if you are correct or not (I never have), you may very well be correct in some of your statements. (Although I have read others responses to your claims and they make some pretty solid points in contrast to some of what you say.) I just don’t agree with your tactics in trying to discredit other solar businesses.

    If you are going to respond, which I am guessing you will, can you please remind everyone which companies it is again that you work with/for? I know there were about 5 of them.

  • Report this Comment On June 04, 2014, at 7:35 PM, ronwiserinvestor wrote:

    I only work for one company and I'm sorry but I won't mention the name here. As for Ray Boggs, he's my boss. Both of us are on the same page concerning the solar lease and PPA financing model. He trained me so it makes sense that we both repeat the same message. As for our writing styles, I feel that I'm far more aggressive with my posts than he is.

    And as for my motives, I have spent many years in this industry and feel quite strongly about the greater good that solar brings to the consumer and fear that solar leases and PPAs with their much higher pricing, payment escalators, use of lower cost materials and potential negative impacts when attempting to sell a home will give the industry a black eye like it did in the 80s when solar hot water was all the craze.

    The solar lease and PPA financing model has served its purpose and now needs to be retired to make way for the next step in taking solar mainstream and that next step in my opinion, will be $0 down loans with tax deductible interest coupled with more affordable pricing.

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