Why SolarCity Corp Can Become a Dominant Solar Manufacturer

SolarCity is taking a huge risk by getting into module manufacturing, but the upside potential is huge.

Jun 22, 2014 at 4:00PM

SolarCity Corp's (NASDAQ:SCTY) acquisition of solar module manufacturer Silevo earlier this week hit the industry by surprise and it comes with huge risks as well as great opportunity. Yesterday, I highlighted the risks for SolarCity and investors, but today, I want to look at the positive side of the acquisition. There are always two sides of the story, and here's the good one if you're a SolarCity investor.

Scty Installers

Can Silevo's modules make SolarCity's installers even more efficient than they are today? Source: SolarCity.

Integration and efficiency will lower costs
SolarCity's acquisitions over the past year have been all about lowering the balance of system costs for solar. Zep Solar makes racking that can standardize installation and integrate with panels, and now modules can be built to integrate with racking and inverters, which Musk alluded to developing in-house. All of this is in an effort to lower the time it takes to install each project.

On the efficiency side, SolarCity is trying to pack more power onto each rooftop, or at least a smaller space on each roof. This will either reduce installation time by requiring fewer panels, or increase power output and increase the number of watts (and potential profit) on each roof.


Source: SolarCity.

The goal is to put more MW of solar up with the same number of installers, and each piece of the supply chain SolarCity brings in-house will lower those costs.

SolarCity doesn't have to be the best
If there's one silver lining in SolarCity's move into module manufacturing, it's that the company doesn't have to be best in breed, it just has to be better than what it could buy for a similar cost on the open market.

The headlines surrounding the Silevo acquisition make it sound like the company will allow SolarCity to suddenly make the best module in the industry for lower costs than the competition. Let's clear that up right now. First, SolarCity will not have the lowest costs in the industry, especially not early on. It's using industry-standard polysilicon and wafers (so those costs are the same as the rest of the industry) and a non-standard manufacturing process that will likely lead to slightly higher costs than commodity competitors, at least initially.

Scty Installation Image

Community solar is a big opportunity for SolarCity, especially with energy storage. Source: SolarCity.

Second, even SolarCity's lofty efficiency targets won't put it at the top of the industry. SunPower has already commercialized a 21.5% efficient panel, and even if Silevo hits the 24% cell efficiency target it has two years from now, it would only match SunPower's current product. By the time SolarCity ramps production, it will likely be 2%-3% behind SunPower.

With those two factors understood, we need to understand that Silevo isn't exactly reinventing the wheel, either. Musk said it can use some standard equipment to manufacture cells and modules and will be buying standard raw materials. So, there's technology risk, but it isn't nearly as high as Solyndra, Evergreen Solar, or any number of companies who have failed trying to make a differentiated product.

If SolarCity can simply ramp up its production capacity with a product that's slightly better than commodity modules and has a similar cost per watt, it will have a huge winner. The cost savings come on the balance of system side and from knowing it has a certain amount of supply at a set cost. That piece of mind alone is enough to make this acquisition a success.

Don't bet against Elon Musk
The one intangible factor in this acquisition is Elon Musk. He has a history of surprising us with revolutionary technology improvements and has the vision to take an idea from the drawing board to reality. So, if anyone can jump into an ultra-competitive business like solar module manufacturing and succeed, it's him.

It will be fascinating to watch what Musk and team do when they begin putting R&D dollars into solar modules and inverters. The 24% cell efficiency target that's been stated is already in sight, but a decade from now, that should be ancient history. I wouldn't be surprised if Musk already has his sights set on cell efficiency of 30% or more, which has been demonstrated in the lab.

If SolarCity can innovate faster than the industry, it will build a huge competitive advantage. That's how SunPower stayed afloat as Chinese competitors cut prices, and it's how they've returned to profitability, and even generated more retained value per watt than SolarCity on each installation. With the right innovation, SolarCity could leapfrog even the industry's best.

If it does, this acquisition will be a home run. Musk is one man who can make that happen.

Foolish bottom line
The upside for SolarCity buying Silevo comes from controlling more of the process, integrating its modules into the rest of the system, and continued innovation. It's not a guaranteed success, but for a $350 million acquisition mostly paid for with stock, it's worth the risk.

At the very least, Musk and team aren't people I would bet against, especially considering the powerhouse they've already built in residential solar.

Get in on America's energy boom
The solar industry is booming but so is the rest of American energy. The good news is that the government is providing tax incentives for you go get in on this market. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers