SolarCity's (NASDAQ:SCTY.DL) announced acquisition of Paramount Solar for $120 million is the company's latest step toward total domination in residential solar. It is also a move designed to lower customer acquisition costs while increasing installations, something that should improve profitability.
The two companies already know each other well because Paramount already does direct marketing to customers for SolarCity. The impetus for this acquisition may have been a recent deal that Paramount signed with Clean Power Finance, a company who finances solar projects but doesn't do installation or door-to-door sales itself. SolarCity has now taken away a sales channel for a company that's viewed as a major competitor in solar.
What does this mean for investors?
SolarCity CEO Lyndon Rive has set a goal of installing 1 million solar rooftop projects within five years and this is a piece to complete that puzzle, but for investors it's all about controlling upfront costs while adding solar leases. SolarCity generated $15.5 million in gross profit from sales and leases last quarter but incurred $21.3 million in sales and marketing costs to generate new sales and leases. Over time, leases will compound on each other and overtake operating costs, but the challenge is controlling operating costs while growing your installed base.
The goal of direct marketing is to increase installations without increasing costs at the same time. So, the figure to watch is operating costs per MW installed. A year ago, the company installed 31 MW with operating expenses of $26.5 million, and last quarter installations grew 71% to 53 MW while operating costs only grew 61%. That trend of higher installation growth compared to operating growth needs to continue, which is a goal of this acquisition.
Foolish bottom line
SolarCity doesn't seem to be having a problem financing its growth through equity investors so now it needs to put that money to work by growing installations. Buying Paramount gives the company a wider net to cast over its target market; hypothetically, it should help lower operating costs per MW installed. The vision of residential solar domination is becoming clearer at SolarCity.
Fool contributor Travis Hoium 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.