Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why SolarCity Corp Has Surged 20% in 2014

SolarCity Corp (NASDAQ: SCTY  ) is trying to play spoiler in the electricity market, making it easy for home owners and businesses to install solar panels on their rooftops. That, in turn, means lower electric bills and less demand for the electricity that utilities sell. It's no wonder then that surging demand for rooftop solar has been driving SolarCity's shares higher.

Roller-coaster ride

It's been something of a roller-coaster ride for SolarCity shareholders this year. The stock started the year at around $57 a share, but by March it had peaked at over $85. It then proceeded to fall to just under $48 a share by the middle of the year before heading back up again to a recent price of roughly $68 a share. At the end of the day, shares are up about 19% so far this year.

Hidden behind all of this share price excitement is a truly fascinating business model. SolarCity isn't simply installing solar panels on roofs. It's making the process easy, taking on the upfront cost and all of the headaches of approval and construction. Its customers simply lease the systems or buy the power under long-term contracts.

SCTY Chart

SCTY data by YCharts

This alone is interesting and makes adding solar to your house both easy and accessible. However, SolarCity is going a step further. Since it winds up owning solar systems backed by long-term power contracts, it is bundling the payments from these systems up to back bonds. This provides SolarCity with capital to continue its expansion efforts and makes the processes increasingly self sustaining. That said, government largess is still critical to making solar financially viable.

And that's why growth is so important right now. SolarCity needs to take advantage of government solar support while it can, including tax subsidies for solar installations and mandates for utilities to buy rooftop solar at what some consider elevated prices. Not only does this support make the math work today, but it gives SolarCity the chance to scale up its solar business so that it can survive when government support goes away, as it likely will, eventually.

The recent tariffs on Chinese solar panels is just one example of such a shift in this fast moving industry. Tariffs of this nature aren't particularly helpful for SolarCity, which sources panels from that country. But this move by the government just makes SolarCity's decision to buy a panel maker and build its own giant panel plant look that much more prescient. As it ramps up its own production, the issue of Chinese tariffs should fade. Despite having a long-term answer to that industry headwind, however, it doesn't make it any easier to invest in a company that's seen its loss per share increase in each of the last three quarters -- which helps explain some of the share price volatility.

In fact, the loss has grown from $0.05 a share in the fourth quarter of last year to just over $0.50 a share in the second quarter. But earnings aren't the most important factor at a company that's growing quickly in a new, and obviously fast changing, industry. That's why, as investors look under the covers, they are finding a lot to like about this solar installer. And that mostly involves the company's underlying growth.

(Source: BrokenSphere, via Wikimedia Commons)

Getting bigger fast

For example, in the second quarter SolarCity's rate of installations increased over 100% year over year. In fact, it installed over three times as much solar capacity in the second quarter (101 megawatts) as it had installed in total in 2010 (31 megawatts). Clearly, the business is ramping up quickly.

Another example of that underlying growth comes from its customer count. The average annual customer growth rate since 2009 is a massive 99%. Now that's not a sustainable number and comes off a small base. However, SolarCity expects customer growth to average a still impressive 70% between mid-2013 and mid-2018. It's also worth noting that SolarCity's market share in the residential solar market was 29% in the first quarter, larger than its next nine competitors combined.

This solar giant's industry-leading position and strong growth are exactly why the shares are 19% higher this year despite the company's losses, industrywide headwinds in the form of Chinese solar tariffs, and the shares' seesaw action. And this isn't a matter of getting bigger just to get bigger. SolarCity's scale has enabled it to issue its third solar-backed bond, lowering its cost of capital, and to reduce its installation costs by over 27% since the start of 2013.

The future is driving this one

Although SolarCity is losing money right now, that's not the most important issue to watch. SolarCity is very quickly building a formidable position in the power industry. The shares should keep heading higher over the long term as long as the company keeps hitting its fairly aggressive growth targets.

Do you know this energy tax "loophole"?

You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. 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.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3088125, ~/Articles/ArticleHandler.aspx, 9/4/2015 10:43:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

Today's Market

updated Moments ago Sponsored by:
DOW 16,144.07 -230.69 -1.41%
S&P 500 1,930.90 -20.23 -1.04%
NASD 4,696.77 -36.73 -0.78%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 10:27 AM
SCTY $50.13 Up +0.34 +0.69%
SolarCity CAPS Rating: ****