Solar panel installer and financing company SolarCity (NASDAQ:SCTY) may have bucked the trend among struggling U.S. solar players. Since its IPO late last year, the stock has skyrocketed more than 55%, fueled by encouraging statistics such as "a new customer [on average] every five minutes." At the moment, the U.S. can't compete with foreign companies when it comes to manufacturing panels, and this company is well aware. After a strong earnings release, and plenty of room to run, this may be the most compelling solar company yet. Here's what you need to know about SolarCity.
You know the story by now. Tons of U.S. and international solar companies, such as First Solar (NASDAQ:FSLR) and China-based Suntech Power (NYSE: STP) have struggled to adapt to the violent shifts in solar demand. The latter is on its way to bankruptcy court and, with $1.14 billion in outstanding debt, could become one of the biggest U.S.-listed Chinese company bankruptcies in many years. This has particularly scary implications for U.S. bondholders, who would likely come second to their Chinese counterparts.
First Solar was only a few years ago the shining star of U.S. solar players, trading at more than $300 per share, and pumping out panels faster than the speed of light. http://theenergycollective.com/josephromm/187511/chinese-companies-solar-panels But, because of Chinese innovation, which has led to a 50% drop in module costs in just three years, the company cannot compete, especially with the volatile short-term shifts in demand
The story is far different for a relatively new solar player, though. SolarCity has taken a more consistent, supplementary approach to the business. This has allowed the stock to outperform, with far less volatility, the solar industry and the market as a whole. Debuting on the market in mid-December, this solar energy system designer, installer, and financier has proven, thus far, that solar can be a predictable, sustainable business.
We can find proof of this in the company's most recent earnings release.
In 2012, SolarCity's customer base grew 243%, and installed more than $1 billion worth of solar energy systems. Using cheap, foreign-made solar panels, the company focuses on high-value design and installation -- far removing it from the panel manufacturing business, which has been one of the most difficult to run given long lead times for plant building, mismatched with quick shifts in panel demand.
The company, whose chairman is technologist and electric-car-making spaceman Elon Musk, saw recurring operating lease revenue (one of the major cash-faucets) doubled from $7 million, to $14 million in the fourth quarter. Total revenue grew from $20.7 million to $25.3 million. Gross profit margin made a huge leap to 56%, from 40% in the year-ago quarter. Though the company had a negative bottom line, the fourth quarter generated $64.7 million in operating cash flow.
On the full year front, lease revenue jumped 106%, to $47.6 million, total revenues grew to $128.7 million, from $59.6 million, and gross profit margins hit 40%, up from 21% in 2011.
The financials may seem a bit confusing on their surface, but its important for investors to focus on the number of new energy contracts. These are investments for the company up front, but create long-term, predictable cash streams that increase as time goes on. SolarCity should still be considered a very young company, and its nearly 27,000 new energy contracts from 2012 alone will, in time, bring bottom line earnings far out of the red.
Why I love this business
I will not invest in a high-tech, complicated business based on the prospect of massive growth. While it works for many investors, including some top Fools, I prefer boring and predictable businesses all day. So, it may seem odd that I would support a solar business. But this one is a simple, cash-generating machine that directly benefits from the long-term trends of solar adoption, without the risk of short-term demand fluctuations. While it's a technologically complicated and disruptive company, SolarCity has a very simple model, with cash flow streams that are easy to forecast. For many customers, the installation and panels cost nothing up front. SolarCity then owns the energy, and leases it back to the customer, sometimes with a contract that locks in prices for the customer. By most studies, this is a very efficient means of paying for utilities, and allows for the customers, investors, and company to produce strong ROIs.
In the company's recent conference call, CEO Lyndon Rive confidently stated, "We are clearly on our way to building the most compelling energy company in the 21st century." Now, CEOs can often be boastful and overshoot the importance of their mission; but this is one time where I am inclined to agree with the chief executive. Much like the resource it exploits, SolarCity has found a way to run a constant, reliable energy company whose long-term benefits far outweigh the short-term trends.
The company recently recapitalized some of its debt at much more favorable rates, and it only makes sense. As the company's CFO mentioned in the conference call, "What we're financing with these assets are 20-year contractual cash flows. It's a very high quality predictable cash recurring and with the low operating cost structure. When you bring that asset to the marketplace it will achieve a very attractive cost of capital."
Not to abuse the point, but many solar companies face the immense hurdle of tremendous up-front costs, with volatile, unpredictable returns. This is why companies like First Solar and Suntech have gone from market darlings to pariahs.
SolarCity management expects 250 MW in total deployment for 2013. With 195 MW in backlog from the prior year (not all to be realized in 2013, but the point still stands), and consistent customer growth every quarter, I believe the company will have no problem meeting, and surpassing, that 250 MW target.
For investors compelled by the long-term solar trends, which are still very encouraging, this is your play. SolarCity may be the most risk-averse, simple solar business available today.
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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.