The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash-flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul.
SolarCity (NASDAQ:SCTY.DL) is this month's addition to the Pencils IRA Project. The stock does not look cheap by standard measures of valuation, but I expect this business to trade at a premium for many years to come. SolarCity is revolutionizing the field of energy delivery in the U.S., and it expects one day to expand beyond U.S. borders. Last month the company passed the milestone of 100,000 customers, and I believe it will add hundreds of thousands -- and, eventually, millions -- in the coming years.
1. Purpose-driven business
SolarCity's purpose, since its founding in 2006 by brothers Peter and Lyndon Rive, has been to make solar technology a more-available, widespread energy source. "SolarCity's mission has always been to help homeowners and businesses adopt clean power while saving on energy costs," explains CEO Lyndon Rive. The Rives are determined to demonstrate that people can help the planet and save money at the same time.
In less than a decade, SolarCity has grown into the largest installer of residential solar systems, demonstrating the viability of solar energy as a mainstream energy source. Despite the company's early success and continued expansion, the Rives remain focused on their original goal.
"What's important is the mission," states Lyndon Rive. "If I wanted money, I would have cashed out a long time ago."
2. Innovative products and services
SolarCity's bread and butter is installing rooftop solar systems free of charge and selling the electricity at rates up to 15% lower than traditional utility rates. In essence, SolarCity offers "clean" energy to residential and commercial customers with no upfront cost and lower rates than consumers pay for "dirty" energy sources like coal and other fossil fuels. In addition to residential users and businesses, SolarCity's clients include colleges, school districts, local governments, and nonprofits.
Currently serving more than 100,000 customers in 14 states, SolarCity captures 32% of the residential solar-installer market in the U.S. (up from 17.4% in 2012). "The benefit of market share is it gives us more economies of scale," explains Lyndon Rive. "By getting more economies of scale, we can continue to invest in technology and services that will continue to separate us even further from our competitors and our value proposition to our customers."
Each SolarCity customer contract represents 20 years of consistent revenue for the business in the form of monthly electricity payments. The company's "nominal contract payments" -- the estimated future cash flows remaining on SolarCity's existing contracts -- have increased from $500 million in 2011 to about $2 billion in 2013.
In December 2013 SolarCity completed the acquisition of Zep Solar, a company dedicated to making solar installations more efficient and profitable for solar installers. As SolarCity continues to scale its business on a national level, achieving lower installation times and costs, it will widen its competitive moat. It's important to note that the cost of solar power has steadily decreased -- the cost of solar photovoltaic cells has decreased 99% since 1977 -- while the cost of generating electricity via fossil fuels has increased over the past two decades. As the Edison Electric Institute notes, "Customers inevitably will see these rising fuel costs that electric utilities must pay reflected in their electric bills."
Foolish bottom line
Solar energy, and especially SolarCity, have a bright future (har har). The cost of providing solar energy has decreased, while the cost of providing fossil fuels has tended to increase over the long term. As these trends continue, and as SolarCity reduces its costs via scaling and acquiring businesses such as Zep Solar, SolarCity is poised to reward patient long-term investors with market-beating returns.
For these reasons, as well as the three remaining megagrower pillars that I will examine in my next article, I am excited to add SolarCity to the Pencils IRA Project.