The Solar Company That's Going Vertical

It may be controversial, it may be volatile, but one thing SolarCity (NASDAQ: SCTY  )  certainly is not is unambitious.

With an industry-leading 32% market share of the U.S. residential rooftop market, SolarCity now wants a slice of the solar panel market as well.

The solar finance company recently announced that it will acquire Silevo, a company that makes high efficiency solar panels, for $200 million in stock and potentially an additional $150 million in performance earn outs.

Silevo manufactures solar panels with a cell efficiency of approximately 21%, or roughly the same as that of industry leader SunPower's  (NASDAQ: SPWR  ) , for about the same production cost as that of other top solar panel makers.

The acquisition will make SolarCity vertically integrated like industry leaders SunPower and First Solar  (NASDAQ: FSLR  )

The market liked the news and sent SolarCity stock rallying over 17%.

Market applause for a potential game-changer
With the rally, the market is voting that the acquisition is a brilliant move by SolarCity.

If done well, the acquisition could indeed be a game changer for the company. By becoming vertically integrated, SolarCity will have a new sector in the gigantic global solar panel market to grow into. With the right R&D, Silevo's solar panels could also be the crucial ingredient that differentiates SolarCity from other rooftop solar installers/financiers. It could provide SolarCity with a technology moat that so many detractors say the company lacks.

With its plan to build a solar panel factory with 1 gigawatt of annual capacity in New York in two years and factories with potentially as much as 10 gigawatts of annual capacity in the following years, Silevo will also put SolarCity in the big leagues in terms of solar panel production. 

To put 10 gigawatts of annual capacity in perspective, the global PV solar panel market is only expected to be 54 gigawatts in 2015 and 118 gigawatts in 2020.   

Lastly, the acquisition should also cushion SolarCity from the negative impact of recent U.S. duties on Chinese solar panel imports.

The bottom line
Up to this point, SolarCity management has executed beyond most analyst expectations in terms of gaining market share and containing costs. It remains unclear, however, whether management can do the same in the solar panel market, where the gross margins are lower and the competition is tougher. 

Producing solar panels efficiently and cost effectively is radically different from installing solar panels on rooftops and lining up solar financing. If actual solar panel demand does not meet expectations, the acquisition could also potentially expose SolarCity to industry oversupply.

That being said, with the acquisition of Silevo, SolarCity is showing that it is willing to do whatever it takes to succeed. In a recent blog post, SolarCity said it may do further acquisitions down the road to ensure clear technology leadership. With a market capitalization of over $6 billion, SolarCity certainly has enough currency to fulfill its ambitious goal of accelerating mass adoption of sustainable energy for all. 

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Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

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