Is It Time to Buy SolarCity Stock?

SolarCity has been one of the hottest stocks on the market since it came public, but can it continue to rise?

Aug 20, 2014 at 9:00AM

SolarCity (NASDAQ:SCTY) is not only one of the most talked-about stocks in the solar industry, it's one of the most revolutionary companies in America today. It's redefining the way we think about energy and turning your average household rooftop into a moneymaking asset, something it's never been.

After rising five-fold since its IPO, the question is whether the company is poised for long-term stock market gains or if investors should watch from the sidelines. Let's take a look at SolarCity's future and how it's valued versus competitors.

Solarcity Solar Community Image

Solar home communities are increasingly popular in the southwestern U.S. Source: SolarCity.

A growth machine
One of the surprises about SolarCity since it went public is how fast the company has grown. It's easy to see how a small company doubles revenue or installations each year as a private company, but as a public company with a significant share of the U.S. solar market, it was tough to predict that SolarCity would nearly double installations in 2013, 2014, and expect to nearly double again in 2015. But that's exactly what the company has done on its way to predicting as much as 1 GW in installations next year.

What's incredible is that Chairman of the Board Elon Musk and CEO Lyndon Rive expect SolarCity to continue its rapid growth. When the company bought solar panel maker Silevo, they said early manufacturing would be on a scale of 1 GW, with subsequent years reaching as much as 10 GW, which would make it the largest solar panel manufacturer in the world. If SolarCity can install anywhere near 10 GW annually, it would be a steal at a $6.6 billion market cap.


Source: SolarCity.

The manufacturing strategy also further vertically integrates SolarCity and puts it in direct competition with SunPower, which is one of the largest residential solar installers in the world, providing panels, financing, and other services to installation partners. When combined with Vivint Solar, which is expected to go public this fall, these are really the three companies battling for the residential solar market today. 

Long term, there are two levers SolarCity can pull to create value: increasing installations and making more money on each installation. When it comes to growing installations, SolarCity is firing on all cylinders.


Small commercial installations have been added to SolarCity's business in recent years. Source: SolarCity.

Long-term value creation
When SolarCity installs a solar system, it signs the customer to a long-term solar lease. The value created for shareholders is through the excess cash flow from those lease payments minus the costs paid to build a system. SolarCity judges itself by the present value of these cash flows in a metric called called retained value.

As of the end of Q2 2014, retained value was projected at $1.8 billion and grew over $500 million last quarter alone. What's amazing is that retained value per watt grew to $2.32 last quarter, the highest we've seen since SolarCity went public.

What SolarCity has been able to do is lower installation costs faster than anyone anticipated by standardizing things like racking, inverters, and solar panels (through the Silevo acquisition). As these costs continue to fall, the company will remain competitive with others in the solar market -- even if financing structures transition to loans or cash sales.

The unknown is whether or not SolarCity will be able to maintain anywhere near $2 per watt in retained value with installation costs falling and competition increasing. I expect consumers to switch to buying solar systems with lower margin cash or loans, reducing some of the value SolarCity can generate per watt.

So, while installations will grow rapidly, the value created per watt installed will likely fall. That's to be expected in solar, but it also makes valuing the company very difficult.

Solarcity Rooftop Solar Installers

SolarCity workers install a residential solar system. Source: SolarCity.

SolarCity isn't cheap, but it may be worth buying
SolarCity has done a great job selling the market on its retained value model, and if we go on that alone, the stock is a fair value. Through the end of the second quarter, the company averaged $1.72 per watt in retained value and $1.8 billion in overall retained value on the books. If we multiply the per watt retained value by the projection of up to 1 GW of installations next year, we could see $1.72 billion in new retained value in 2015. Even if we subtract $400 million for operating costs, the retained value added minus operating costs could be around $1.3 billion.

A $6.6 billion market cap puts the stock at just 5 times forward potential retained value minus operating costs. When you consider the company's growth trajectory, this could be a conservative price if the market doesn't change significantly.

But that's where SolarCity will run into challenges. It's still not profitable, and the valuation metrics I've used above are based on 20+ year projections that may or may not come true. Plus, long-term competitors will begin taking more market share, and I think the industry will transition to loans or cash sales that are far lower margin per watt. $2 per watt in value creation is a pipe dream a few years from now.

If you're looking for a lower risk solar investment, SunPower makes the industry's highest efficiency panels and is profitable, something SolarCity can't say. The stock trades at 25 times trailing earnings, and that's before including nearly 300 MW of solar projects that have been built on the balance sheet. It won't be the growth company SolarCity is, but it has real profits to point to and already makes solar panels, so it doesn't have the risk associated with SolarCity's manufacturing plans. 

Foolish bottom line
With all of these factors considered, SolarCity's sheer scale and cost advantage won't be easily replicated by anyone in the solar industry. SolarCity is a cost and innovation leader, and while it isn't the safest stock, it has a tremendous growth opportunity. At a $6.6 billion valuation, I think investors who buy and hold for the long term will do very well. Just keep in mind that the ride can be bumpy, so a long-term view is necessary as SolarCity builds out the vision Elon Musk and team see over the next decade. 

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

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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