For a stock that was hotter than the sun for most of 2013, the past week and a half has been colder than ice for SolarCity Corporation (NASDAQ:SCTY.DL). The reason I'm adding the Elon Musk-inspired solar leasing business to my Real Money portfolio is that I don't understand why Mr. Freeze has honed in on this particular target. All SolarCity has done recently is release positive news – aside from the allegations that it overstated the value of solar installations for tax break purposes. More on that in a second, but first, let me add the caveat that competitors such as First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) receive the same tax credits that for which SolarCity is coming under fire.
Coming to a neighborhood near you
Since the beginning of 2012, SolarCity has been emulating its photovoltaic panels by absorbing market share – rather than solar energy – in the residential solar space at a staggering pace. With data from the second quarter of 2013 providing the overall picture, 26.2% of the puzzle has been solved by SolarCity. Considering that its market share at the beginning of 2012 was only 12%, I'd consider this a fairly noteworthy achievement.
Controlling more than a quarter of the residential solar market might seem like SolarCity might be nearing its peak. That notion couldn't be further from the truth. 2013 is nearly over, and company estimates predict the deployment of 278 megawatts, or MW, for the entire calendar year – up 77% from 2012. Continuing to focus on the future, management confidently expects to install 71%-89% more capacity in 2014, guiding for a range of 475-525MW.
Now, I understand that management guidance can be written off as conjecture, but stop for a moment and take a look at the headlines SolarCity has been mentioned in lately. In the past few weeks alone, it has signed deals with major home builders in the sunbleached states of Florida and Texas to have its solar panels installed in the builders' future inventory. At the same time, it has announced that it will be expanding its footprint in California in the form of 10 new operation centers, placing a center within 30 miles of 90% of all Californians by the end of 2013.
Costs – not the sky – are falling
Even with less than 1% penetration of the entire electricity generating industry, SolarCity continues to see cost reductions ahead of schedule. Based on its latest quarter, its cost per watt is now 70% of what it was to begin 2012. Based on the current state of cost decline, CEO and co-founder, Lyndon Rive, is publicly bullish on maintaining this downward trajectory as solar power continues to acquire acreage in the overall U.S. energy landscape.
Financing in a blue ocean
Recurring cash flow is a staple of most debt securities. The predictable payouts give investors good reason to pony up sizable amounts of cash now, in return for the streaming, interest-bearing payments later. What SolarCity has recently opened the world's eyes to is that its solar leasing model fits this bill to the T.
In its trial run, SolarCity was able to raise $54.4 million by issuing "bonds" backed by its leased solar panels. This securitization was the first of its kind and had the backing of Standard & Poor's, which denoted an investment grade credit rating of BBB+. Over the next 13 years, investors will earn 4.8% on their upfront investment while SolarCity plans to put the funds to work almost immediately. Based on the excitement behind the freshly completed round, investors shouldn't be surprised if offerings such as these emerge from SolarCity on a quarterly basis.
Innocent until proven guilty
Recently, Senator Jeff Sessions from Alabama added congressional fuel to the kindling sparked by a Barron's article from August of this year. A bit of background on Alabama and the solar industry – it ranks 40th out of 50 states in terms of total solar grid capacity. Clearly, he has failed to witness similar benefits that top producing states such as California, New Jersey and Arizona have come to appreciate. Now, just because Alabama doesn't utilize solar power as much as it could, doesn't automatically discredit Senator Sessions' claims. No, the letter of law is likely to do a pretty good job of that.
Shortly after an SEC-mandated quiet period, SolarCity's management team posted a note addressing the allegations. After reading over the company's response, with direct references to Treasury Department and IRS guidelines being followed precisely, I am confident that the review process will absolve the company of any wrongdoing. That being said, should SolarCity be found guilty of inflating the fair value of its systems, it could face fines in the tens of millions of dollars. Fines at these levels would be particularly deflating for the company's recent success and for the price of outstanding shares.
Ready to harness the sun's power in my portfolio
To be certain, this decision has not been made lightly. For many months now, I have been on the fence when it comes to investing in the solar industry. It wasn't that I didn't believe in the idea, it was that I continued to find it difficult to pick a winner. After taking a much deeper dive, I am a believer in SolarCity's proven, albeit limited in history, success. It seems that, almost on a daily basis, new partnerships are being formed – e.g. with BMW and Tesla – or results come in well ahead of expectations. Following the recent 16% slide since November 14th, this appears as good a time as any to pick up some shares in anticipation of strong, future performance.