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6 Risk Factors That Could Destroy SolarCity

Solar power is one of the most promising industries of the next few decades -- potentially transitioning the world toward sustainable, clean, and renewable energy. Environmentally friendly and cheap electricity promises to create jobs, fuel economic prosperity, and make long-term investors rich. 

US Solar Energy Production Chart
U.S. Solar Energy Production data by YCharts.

U.S. solar power production has grown at 20% annually over the past decade, and the potential worldwide is even better. For example, IHS estimates that global solar installations through 2020 will total 537 GW, an estimate that is up 13% since last year and represents $1 trillion in investment in just the next six years. 

Companies like SolarCity (NASDAQ: SCTY  ) and SunEdison (NYSE: SUNE  )  offer distributed solar systems that could make them into the solar utilities of tomorrow. They promise to let investors cash in on what may be one of the largest long-term energy bonanzas in history and have become Wall Street darlings.

SCTY Chart
SCTY data by YCharts.

Although the potential for SolarCity is indeed massive, investors should be aware of six major risk factors that threatens not only SolarCity's short-term share price but its entire long-term business model. SunEdison is also affected by several of these; however, thanks to the IPO of its yieldco Terraform Power Inc (NASDAQ: TERP  ) , I believe SunEdison makes a more promising long-term investment -- at least at the moment. Check out the slideshow below to see why. 

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Read/Post Comments (12) | Recommend This Article (14)

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  • Report this Comment On July 24, 2014, at 3:33 PM, photonics wrote:

    Great points. Especially about more homeowners choosing $0 down loans with tax deductible interest over a solar lease with a 2.9% annual payment escalator.

    And now that homeowners are discovering the problems of trying to sell a home with a lease attached to it, solar leases simply don't make sense in today's market.

  • Report this Comment On July 24, 2014, at 4:30 PM, clanza875 wrote:

    I still don't understand what SCTY offers that can not be duplicated by anyone else!?!

  • Report this Comment On July 24, 2014, at 5:12 PM, AdamGalas wrote:

    It seems to me that SolarCity's biggest asset is that management has the relationships necessary to continually raise tax equity funding to allow them to grow.

    Combined with solar system backed backed bonds, SolarCity is proving to be very good at innovative financing.

    So while there is very little physical moat protecting them, (SunRun is considering an IPO on the same business model) SolarCity's fame and management team seems to be able to win market share due the strength of their celebrity/relationships.

    That's the benefit of having Iron Man as chairman of your board and its largest shareholder, instant credibility, at least in the eyes of many.

  • Report this Comment On July 24, 2014, at 8:51 PM, yahoo123 wrote:

    Iron Man is just one and SolarCity is also one.

    Writing same thing every week, again and again won't bring SCTY price down.

    You should buy cheap ones - RGSE, SLTD there are many more in the market!!

  • Report this Comment On July 24, 2014, at 9:13 PM, yahoo123 wrote:

    Adam Galas has no position in any stocks mentioned. But Dreaming of SCTY @ $20 every week!!

    Keep dreaming .....

    1. One more thing, Solar Tax Credit can be increased.

    As technology growing and Solar technology get better and better. I am sure gov will give more time to grow.

  • Report this Comment On July 25, 2014, at 5:25 AM, CalCase wrote:

    Solar city has many great points just read the Seeking Alpha article out today.

    Still time to jump on the SCTY wagon but not for long.

    Good luck traders!

  • Report this Comment On July 25, 2014, at 3:40 PM, yahoo123 wrote:

    AdamGalas@- SolarCity Announces Pricing of Third Securitization.

  • Report this Comment On July 25, 2014, at 6:11 PM, AdamGalas wrote:

    Great to see a conversation going. A few points:

    1. Despite my concerns about its risks factors I am actually planning to take a small initial position in SolarCity in the next few days.

    That decision was made after extensive research but can best be summed up by one fact. 73% insider ownership.

    SolarCity may be a speculative and unproven business model, but its potential is massive and if this grand adventure fails, at least I know Musk and his cousins will lose a ton of money with me (at least % speaking).

    2. Like any long-term Foolish investor, I'd like to see prices decline so I can buy more and lower my purchase price.

    3. The ITC (solar tax credit) could be raised but Nate Silver at fivethirty eight says its a toss up whether or not the Democrats can hold the Senate. Right now his model shows Democrats finishing with 50 seats, Biden being the tie breaker.

    However, many of those races are very close and fluctuating between Dems losing and winning the senate.

    A Republican Congressional take over is pretty much the death knell of the ITC. It will drop to 10% in 2017 as planned or could even be eliminated entirely.

    4. Agreed, SolarCity has many strong growth catalysts. The most intriguing are:

    -potential for integration into new homes

    -Military installations, 579,000 DOD buildings could be a game changer for SolarCity

    -integration with Tesla batteries for energy storage, independence from the grid and many state's net metering caps.

    -international expansion

    5. $201.5 million in solar backed bonds, $160 million at 4.03% and the remained at 5.45%.

    I can't fault SolarCity for its innovative financing. The use of tax equity funds is certainly fueling hyper growth and these solar backed bonds are a great way to minimize dilution.

    However, it will be interesting to see during the next conference call how management plans to pay for the Riverbend Panel plant.

    $750 million is a lot of money and the article its yet to be seen if that will cover the entire 1 GW capacity or if Silevo's partners will get a cut of that.

    My biggest problem with SolarCity has to be its Silevo acquisition. Up until now they have been tech neutral. Buy the best and cheapest panels and let panel makers race to the bottom while your gross margins improve.

    Now? Well SolarCity is no longer "different" than other panel makers, now its also a panel maker. Except that its capacity of 32 MW is miniscule and it will take billions of dollars to expand it enough to cover its growth needs.

    By the time the Riverbend factory is online, its likely that chinese panel makers will have the same efficiency at a lower price.

    Tesla decided to build the GigaFactory because there wasn't enough battery capacity to achieve its growth plans.

    SolarCity isn't supply constrained in the same way. There is an oversupply of cheap panels and so the wisdom of choosing to vertically integrate is something I look forward to management explaining at its conference call (I've read transcripts of them all and management is very good at explaining its decisions).

  • Report this Comment On July 25, 2014, at 9:32 PM, yahoo123 wrote:

    AdamGalas @ Now you are talking. After 3 ugly articles which were based on air.

    Now these are real facts.

    Good try to bringing price down, but rather it went up!

    I feel sorry for you!

    I am sure it will reach $80 soon! Hurry up!!!

  • Report this Comment On July 26, 2014, at 9:23 AM, AdamGalas wrote:

    Though I'd like to buy at a cheaper price, my articles were hardly hit pieces designed to inspire selling.

    SolarCity has immense promise, this is true. Internationally, in 50 years? Who knows, they might have 100 million customers, 500 GW of capacity and $1 trillion of actual retained value.

    Depending on the dilution it takes them to get there, it might end up being a 50-75 or even 100 bagger, even from today's valuation.

    However, the risks to the company are certainly real and valid.

    What I love about SolarCity is the challenge it provides as an investor. It has so many moving pieces, so many pros and cons that it makes for very stimulating conversation and analysis.

    Then there are the social ramifications of the company. The social responsibility side of things, that the Rives and Musk seem on a mission to save the world and some of their decisions might help the company at the expense of shareholder value.

    One example is the Silevo acquisition. After reading some articles by Travis Hoium, I think I figured out their strategy with that and in a future article I'll explain why its a brilliant but incredibly risky long-term play.

    One that, if SolarCity makes it to 2020, could ensure their dominance in the decades to come, but might also bankrupt the company in the short-term.

    That's what so great about SolarCity. Its a wild adventure, one that involves politics, environmentalism, business, finance, and rapidly evolving technology.

    And no matter how it plays out, the Rives, Musk and those running the company are passionate true believers who see themselves on a mission that rises above mere profits.

    That kind of social capitalism, when combined with major megatrends, could result in long-term performance better than Costco or Wholefoods.

    Or it could all go down in flames if there's another crisis and credit dries up, or a dozen other threats to a yet unproven business model.

    SolarCity is a true rule breaker, with all the associated benefits and hazards that come with that title.

  • Report this Comment On July 29, 2014, at 6:43 PM, mauser96 wrote:

    The Sievo acquisition is just SolarCity putting a toe in the water of solar cell manufacturing. They still will buy most of their panels from other companies.

    Maybe it is an attempt to find and produce a really superior solar panel, one not a commodity. If they do, they will be able to manufacturer it themselves.

    Maybe they are looking beyond present solar panel surplus and into a future of shortage. Typical of commodity markets is that they fluctuate between the two with little warning.

    What would happen if for political reasons Chinese solar could no longer be sold here or was hit with high tariffs?

    Elon is not afraid of well analyzed risk, and I suspect his cousins are the same.

    The risk of another credit crisis like the last one is close to zero.... Central banks have their finger on a hair trigger of helicopter money. Inflation, is the risk, and that helps borrowers.

    The biggest threat to the stock price over the next few years is the onset of the inevitable bear market and recession.

  • Report this Comment On July 29, 2014, at 6:46 PM, mauser96 wrote:

    Backing up my last comment is this

    "Last week's anti-dumping tariffs will be placed on top of the anti-dumping tariffs announced in June and will make it next to impossible for Chinese manufacturers to be competitive in the U.S. "

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Adam Galas

Adam Galas is an energy writer for The Motley Fool and a retired Army Medical Services Officer. After serving his country in the global war on terror, he has come home to serve investors by teaching them how to invest better in order to achieve their financial dreams.

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9/3/2015 3:59 PM
SCTY $49.79 Up +0.37 +0.75%
SolarCity CAPS Rating: ****
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TERP $23.36 Up +0.68 +3.00%
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