Despite SolarCity Corp.'s (NASDAQ:SCTY) proposed merger with Tesla Motors, the company still has to maintain its focus on operations in 2016. The merger might not go through and if it doesn't, SolarCity will have to generate value on its own.
After a few straight quarters of disappointing results, SolarCity has a lot to prove to investors in the second quarter. Including, but not limited to, that the negative trends it is facing aren't negatively affecting its business.
Is market share holding steady?
When SolarCity reported first-quarter 2016 results, it reported an increase in installations from 153 MW a year ago to 214 MW in the quarter. But bookings were so weak during the quarter that it lowered full-year guidance from 1.25 GW to 1.0-1.1 GW.
One of the reasons for the reduction in guidance was the lack of a loan product, something the company has remedied recently. Another was the absence of urgency in signing up customers after the solar investment tax credit was extended late in 2015.
But the fundamental problem could be that SolarCity's business model is being upended by more nimble regional installers. GTM Research recently reported that regional installers grew nearly twice as fast as national installers in Q1 and there seems to be little reason not to think that this trend will continue.
Most of the construction industry is dominated by local or regional contractors, not national installers. These smaller companies can adapt more quickly to changes in local demand and labor markets, giving developers more flexibility. Many executives in the solar industry (The leadership at Sunrun, Kilowatt Financial, and SunPower, to name a few) have long thought that regional contractors were the lowest-cost installation method all along, and if SolarCity continues to lose market share, it may prove that theory fairly quickly.
Are costs going down or up?
The slower-than-expected growth has another negative side effect: rising costs.
Since SolarCity has fixed operating costs for sales, installations, and administrative staff if it doesn't hit growth targets, those costs are spread over a smaller number of installations. That happened in Q1 2015 and that's why you see the sharp rise in costs.
If slow growth continues, we could see installation costs go up. This would make SolarCity less competitive with regional installers and squeeze margins, potentially leading to even more customer losses. Having the Tesla merger hanging over the company can't be making it easier for sales staff to sign contracts over the past month, either.
Where is the solar panel plant?
If you listen to Elon Musk talk about his vision of the future of energy, one thing he'll often mention is an energy offering with high-efficiency solar panels. Today, SolarCity installs the same commodity solar panels most other solar installers offer, but that is supposed to be changing with the Silevo plant being built in Buffalo, New York.
The issue is that the plant is about two years behind the original schedule when the company was bought and investors still have no idea if SolarCity will be able to produce high-efficiency solar panels at scale and at low cost. If it can't, there will potentially be hundreds of millions of dollars wasted on the effort.
SolarCity needs this solar panel differentiation to stay ahead of competitors, especially considering the rise of regional solar installers. Management needs to give a clear idea of when the Silevo product will hit the market because if it's delayed again, the value proposition for SolarCity starts to diminish for the long term.
A lot of questions for SolarCity
If SolarCity doesn't at least hit its installation guidance of 185 MW in the second quarter and shows that costs are coming down, the company could be in for another rough reaction to earnings. And if the business is in decline, we could even see Tesla back out from its merger offer. This quarter will be telling for SolarCity and it needs to hit its marks to get back in the market's good graces again.
Travis Hoium owns shares of SunPower. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. 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.