Will SolarCity Beat Out First Solar and SunPower?

SolarCity (SCTY.DL) will release its quarterly report on Wednesday, and shareholders have seen their stock more than quadruple in value since its IPO less than a year ago. The company might be far away from profitability, but the bigger question that long-term investors are asking is whether SolarCity can eventually eclipse First Solar (FSLR 2.85%) and SunPower (SPWR) by appealing to individual and small-business users to adopt small-scale solar energy generation.

For years, the solar energy industry focused on large-scale utility projects with the capacity to serve thousands of customers. But SolarCity has made huge waves in the residential solar market, appealing to individual homeowners and small businesses with installations designed to take advantage of plentiful subsidies and tax credits in many locations. Yet although First Solar has largely remained in its comfortable utility-scale project niche, SolarCity's success has prompted SunPower and a host of other competitors to do battle in the small-scale solar field. Let's take an early look at what's been happening with SolarCity over the past quarter and what we're likely to see in its report.

Stats on SolarCity

Source: Yahoo! Finance. * Out of three quarters since going public.

Can SolarCity earnings shine this quarter?
Analysts have gotten less enthusiastic in their assessments of SolarCity earnings in recent months, widening their loss estimates by $0.06 per share for the third quarter and double that for the full 2013 year. The stock, though, has kept rising sharply, with gains of 35% since early August.

We've already gotten a sense of SolarCity's key metrics for the third quarter, as the company preannounced some of its numbers last month. SolarCity reported installing 78 megawatts of solar products and boosted its guidance for 2014 to between 475 and 525 megawatts. The guidance implies growth of 70% to 90%, following up on SolarCity's promising results in its second-quarter report.

In particular, SolarCity's prevalent use of leases has turned the industry upside-down, as outright sales are dropping as customer prefer the certainty of locking in savings in a long-term contract without paying money down upfront. That popularity has pushed SunPower heavily into the residential market in order to compete, even as First Solar has relied on its traditional utility-scale projects.

Despite its success, SolarCity faces some potential clouds on the horizon. Utilities have been highly critical of the net-metering pricing mechanism that allows homeowners to get credits against the power they generate from solar power, claiming that it doesn't cover the costs of providing reliable grid service 24 hours a day. Utilities would prefer to pay lower wholesale rates instead, which could crush the profit potential for SolarCity and SunPower's booming residential-installation business.

But SolarCity is moving forward quickly to take maximum advantage of the solar opportunity. Last month, it bought Zep Solar, which makes the racks on which solar panels and inverters are installed. That follows up on SolarCity's purchase of Paramount Solar in September, which gives it greater marketing expertise in order to boost sales. All told, the strategy shows SolarCity's intent to become vertically integrated rather than relying on outside companies for key parts of its supply chain.

In the SolarCity earnings report, pay special attention to the ongoing mix between leasing and outright sales activity. Just this morning, SolarCity announced plans to offer a private placement of solar-backed notes, showing the securitization potential from its streams of future lease payments. In the long run, SolarCity's biggest profit center could eventually come from the long strings of payments it receives from its customers, beating out First Solar and SunPower by building strong relationships with homeowners and businesses that last for decades.

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