The latest spike in shares of SolarCity (NASDAQ:SCTY), the biggest U.S residential solar installer, was prompted, according to several analysts, by the company's recent acquisition of Silevo. Is this the game0changer that SolarCity has been waiting for? Will this purchase be enough to overcome its headwinds?
Raised tariffs on solar panels from China
One of the problems the company has recently faced is related to the announcement made by the U.S. Department of Commerce that it plans to raise tariffs on solar panels manufactured in China. This issue is likely to impact not only SolarCity, which currently imports some of its solar panels from China, but also solar manufactures such as JinkoSolar Holding (NYSE:JKS), which produces all of its panels in China. The raised tariffs are likely to increase SolarCity's operating costs, which could narrow its profitability in the near term.
This acquisition is SolarCity's attempt to enter the manufacturing business in the U.S. Under the terms of the agreement, the company will purchase Silevo for up to $350 million in stock, although $150 million of this sale price will be paid only after certain production millstones are reached.
This purchase was made after SolarCity struck another deal earlier this month with REC Group to acquire 100 megawatts, which could grow to 240 megawatts, per annum starting at year-end.
While Silevo currently has 32-megawatt factories in China and California, the main focus is on its future plans, including building a 200 MW module factory in New York, which might scale up to a 1-gigawatt plant within the next couple of years.
If SolarCity reaches this goal, the company could have one of the largest solar panel production factories in New York. Moreover, some analysts think Silevo's production in China won't be subject to the new hiked tariffs because they don't apply to the specific type of solar cell the company produces.
But since Silevo isn't, for now, a big producer of solar panels and cells, and the main value of the company will come from its future projects, this play won't have a big impact on SolarCity's operating costs anytime soon.
Is this a game changer for SolarCity?
Over the long run, this deal will reduce SolarCity's operating costs, especially if Silevo increases its cells' and panels' efficiencies levels. But it could be a long time before SolarCity gets a return on its investment and before Silevo meets SolarCity's demand. After all, SolarCity plans to install roughly 525 megawatts in 2014 and 950 MW by 2015.
This deal also changes the risk associated with SolarCity's operations because it has entered the business of manufacturing solar panels. This new investment brings additional operating risk related to the construction of a new factory and a risk that other solar panel manufacturers bear (e.g. cutting costs, increasing efficiency of panels, etc). Therefore, this increased level of risk may also have an adverse effect on SolarCity's valuation.
This deal is likely to lower SolarCity's operating costs in the coming years, but in the meantime this purchase won't have much of an impact on its profit margin. This purchase also opens the door to additional risks related to manufacturing, which may, over time, negatively impact SolarCity's valuation.
Lior Cohen 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.