The 2012 IPO season seems to have ended on a very positive note, with solar installer and financier group SolarCity (SCTY +0.00%) jumping up nearly 20% from the moment the market opened last Thursday. While some may chalk this up to IPO hype and a celebrity endorsement (Elon Musk is the company's chairman), I believe this may be the most interesting solar play to enter the public markets. After a tumultuous year of new market entrants ranging from fast food to social media, this may be one of the most solid newly minted stocks available to investors.
Solar IPO? No, thanks.
These days, IPOs tend to turn off retail investors. You can't blame them, given the whole Facebook disaster, the near total loss in Zynga, and a bevy of other IP-Oh-Nos. If you stack the word "solar" on top of IPO, the group dwindles down even further. The solar sector has been an absolutely brutal one to investors who bought in on the idea of high market adoption, only to see Chinese manufacturers making panels for a fraction of the cost and subsequently destroying their investments.
If SolarCity had anything to do with solar panel manufacturing, it would be an automatic no, no questions asked. Any U.S. company still focusing on panel production is just asking for bankruptcy at this point, as it has transformed into a commodity game that no domestic company can afford to play. As for Elon Musk's SolarCity, though, production isn't part of the deal. SolarCity focuses on the parts of the business that are poised to benefit most from the still fast-adopting use of solar power among residential and commercial areas.
Specifically, SolarCity installs systems and aids with financing. In some residential areas, SolarCity provides all of the upfront costs of installation for homeowners -- effectively owning the energy produced and then selling it back to the homeowner. Eventually the company can steer toward creating asset-backed securities with these energy bundles -- an idea that many analysts believe to be very lucrative in the near future. This also circumvents one of the biggest hurdles in solar adoption today -- the installation costs.
The company has installed and managed units from a single home to an entire school district.
So does it make money?
So how does all of this translate financially? For one thing, the company has set itself up for decades of my favorite type of revenue stream -- the recurring revenue stream. Every time SolarCity acquires a new customer, it is essentially guaranteeing years and years of payments down the line as customers pay off the costs and the company owns more and more captured energy. From 2009 to 2011, revenues grew more than 82 %. The company is yet to become profitable, as upfront costs have mounted quickly with widespread adoption, but one can expect this to reverse in the near future as the recurring payments begin to outweigh the start up costs.
Why should I buy?
As far as good management goes, SolarCity ranks high. The company's founders, the Rive brothers, are cousins of Elon Musk, the chairman. While running electric-car company Tesla (TSLA 2.70%), Musk is also very involved in SolarCity's operations and currently owns nearly a third of the company. The entrepreneur has been opening solar charging stations for his Tesla vehicles across California, and you have one guess as to who is building those stations. Though many are a little creeped out by his eccentricity and some doubt the viability of his ventures, Musk is in fact a very, very smart businessman and will be an invaluable member of SolarCity team going forward.
With the securitization of solar systems on the near horizon and multiple profit center business model employed by the company, I believe SolarCity is possibly the best play in solar energy. I also believe that the company will outperform the major utilities, given its growth prospects.
I'm not the only bull, either. Peter Thiel, PayPal founder and Facebook investor, has said that SolarCity (and Tesla) could be the most successful clean-tech company in the United States.
What do you think of this latest clean-tech IPO? Did you buy shares? Sound off below.
