Why SolarCity Needed to Offer a Groupon

The Groupon deal could help solve the upfront-cost problem of attracting customers for SolarCity, but it's unlikely to attract enough customers, further highlighting a major problem for the company.

Jun 5, 2014 at 12:25PM

With growth rates in most key metrics exceeding 100%, SolarCity (NASDAQ:SCTY) seemed like the last company that would need to engage Groupon (NASDAQ:GRPN) to hock its products.

The installer of rooftop solar systems at monthly costs comparable to the local power utility, SolarCity doesn't appear to lack customers after reaching the 110,000 threshold in the last quarter. Typically Groupon provides promotions for small business clients to attract customer attention in crowded marketplaces. The business proposition relies on obtaining repeat business after getting the customer in the door for the first time.

In the case of SolarCity, the customer signs a 20-year lease with the company for the solar-powered energy. So while the deal locks in long-term cash flow for the company, SolarCity continues to run into one major problem that it hopes to improve with a Groupon deal.

Strong customer growth
For the first quarter, the company added the largest quarterly gain in history, at 17,664 customers. It also deployed 67 megawatts in the residential segment for 100% growth, so the company doesn't lack the ability to add or attract customers. Anybody reading the financials of the hot solar stock will notice one glaring problem after the revenue and growth numbers.

In the first quarter, operating expenses soared even faster than revenue at a nearly 140% clip. For the quarter, total operating expenses increased to $81.8 million, rising from only $34.3 million in the first quarter of 2013. With only $29.1 million of operating lease revenue, SolarCity has a major problem despite the long-term cash flow stream. The company claims the MW acquisition costs declined to only $0.60 per watt, an improving metric but one that doesn't help when the absolute number continues to soar with each additional customer.

The most concerning part is that SolarCity guided to sequential revenue growing on the high end at nearly $14 million, while operating expenses could jump up to $29 million to reach $110 million.

Online customer acquisition
Considering the astronomical acquisition costs that cloud the horizon for the company, the decision for a surprising deal with Groupon might actually make a ton of financial sense. According to Zacks, SolarCity spends $6,000 to $8,000 via a direct sales force to acquire a customer. Considering that amount, the deal with Groupon might just help lower costs.

The Groupon deal involves the customer only paying $1 upfront to consult with SolarCity on installing rooftop solar panels. The customer gets $400 of solar power free if it goes forward with the deal. For SolarCity, the company spends $400 plus a fee for the Groupon service, so potentially around $500 to acquire a customer plus the costs of the consultation -- potentially substantially lower than the current costs.

With more than 200,000 active deals, the benefit to Groupon is likely minimal. Considering SolarCity has to spend significantly to attract existing customers, it would appear unlikely that many would jump on a Groupon for such a big purchase that includes a 20-year lease. With expected revenue of more than $3.2 billion for the year, even if a few thousand customers signed up for the SolarCity deal, it wouldn't move the needle for the stock. 

Bottom line
Investors need to really keep in mind that despite the long-term potential of the SolarCity model, the company is now pushing very aggressively to expand the market. While each individual contract might have an attractive long-term cash flow equation, the company could struggle under its own weight as short-term losses mount and interest expenses grow. The Groupon deal is important for the company to solve the spiraling customer-acquisition costs that aren't sustainable.

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Mark Holder has no position in any stocks mentioned. 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.

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