Since hitting the public markets in late 2012, SolarCity (SCTY.DL) has been one of the hottest stocks in a rising solar industry. The company has proven to be adept at not only growing quickly enough to impress investors, but cut costs and increase long-term value at the same time.
There's never a guarantee that a stock will rise or fall, but here are the three biggest reasons SolarCity could soar over the next few years.
Incredible growth
What SolarCity has done better than any other company in solar over the last two years is grow. In 2013, the company installed 280 megawatts of solar-power systems and expects that to grow to 500 megawatts this year and 900 megawatts-1 gigawatt in 2015.
SolarCity workers install a rooftop solar system. Source: SolarCity.
The ability to scale their sales and installation force is impressive, particularly for a business that's upending the way consumers think about energy. It's the first time that consumers have been offered the ability to be energy producers and SolarCity has created a lease and sales model that makes this transition easy to understand.
As the cost of solar power falls, the market opportunity will grow exponentially, and with a huge lead over competitors in residential solar, SolarCity should be able to maintain a large market share in the space.
Creating more value every day
SolarCity's value for shareholders is based on creating what it calls retained value. This is a present value of the future cash flows of lease customers and at the end of the second quarter stood at an impressive $1.8 billion.
Commercial solar systems are also a growing part of SolarCity's business. Source: SolarCity.
Since retained value is basically the difference between payments from customers and costs associated with building and financing systems, SolarCity benefits from lowering both the cost of installation and financing. On that front, the company is making impressive progress.
Management gave detail in the second quarter on system installation costs and during the quarter average installation costs were $2.29 per watt. That's down an incredible 27.5% from the fourth quarter of 2012 when installations cost $3.16 per watt. Even when sales, general, and administrative costs are included the average system costs just $3.03 per watt.
Financing has made similar improvements, which can be seen by the company's securitization offerings. The first offering opened up a new market for solar but required SolarCity to maintain a lot of the risk on their balance sheet and came with a fairly high interest rate. Below, I've taken some of the highlights from the first and third securitization offering. You can see that the interest rate commanded by the market is significantly lower, the percentage of a system's cost that is securitized is higher, and residential mix is higher.
|
LMC I |
LMC III | |
|---|---|---|
|
Securitization Issuance |
$54.4 million |
$201.5 million |
|
MW Collateralized |
54.9 |
118.0 |
|
Debt Monetization ($/Watt) |
$1.24 / Watt |
$1.71 / Watt |
|
Spread Over Benchmark Rate |
265 basis points |
209 basis points (weighted between two tranches) |
|
Residential/Commercia Mix |
71%/29% |
86%/14% |
Source: SolarCity.
As SolarCity has lowered costs, contract prices have remained similar at $0.15 per kW-hr, allowing margins and retained value per watt to widen over time. If these margins can maintain where they are then SolarCity's growth will add incredible value to shareholders.
Elon Musk
The wildcard in SolarCity's future is Elon Musk. He's the chairman of the board and largest shareholder, guiding the company's strategic direction. There's no doubt that Musk had a large hand in the Silevo acquisition and will play a major role in its future as a manufacturer. But what else does he have up his sleeve?
With a company as young and full of potential as SolarCity you're really betting on the vision and execution of management. At the end of the day, that comes down to Musk. He's not an innovator I would bet against, and if SolarCity is going to soar to new heights he will guide the way.
Foolish bottom line
SolarCity is currently a $6.6 billion company that is still reporting losses as it fuels future growth. That makes it a high-risk stock, but if the company can continue to grow, drive value by cutting costs, and innovate with new products it could be a big winner for investors.
