Elon Musk certainly talks a big game when it comes to solar but it's hard to argue he isn't living up to his own lofty expectations. His solar firm, SolarCity (NASDAQ:SCTY.DL), reported earnings Thursday night that showed just how fast the company can grow in the residential solar market.

Not only did installations more than double from a year ago to 107 MW, bookings rose 216% to 218 MW as consumers began to crave the cost savings solar energy can offer.

SolarCity has begun to build more commercial systems, like this one at the Maui Arts & Cultural Center. Source: SolarCity

What we learned in Q2
SolarCity CEO Lyndon Rive made no mistake about the goal of SolarCity right now. Instead of focusing on cash flow or profits, the company is trying to grow as fast as it can. It certainly did that in the second quarter.

Source: SolarCity.

The strategy is working like a charm because not only did SolarCity install 107 MW in the second quarter, it booked 218 MW of business that will be installed over the next six months. Incredibly, the business it added came with a retained value -- SolarCity's approximation of long-term value to the company -- of $2.32 per watt, the highest it's had as a public company.  

Cost is key
The retained value figure is important because it shows what SolarCity is generating for shareholders long term. As you can see below, retained value shot higher last quarter after dipping during the winter months.


Q3 2013

Q4 2013

Q1 2014

Q2 2014

Retained Value per Watt





Source: SolarCity earnings releases and conference calls

The biggest driver of that increase is costs. SolarCity has done an incredible job scaling its business and lowering costs at the same time. According to last quarter's earnings presentation, cost per watt is down over 25% from 2012 to $3.03 per watt.

To put that into perspective, GTM Research estimated that the average first quarter 2014 cost per watt for a residential solar system was $4.56 and commercial systems cost $3.72. So, SolarCity is already operating well below the industry's cost structure.

The largest component of a system's cost is the actual installation and on that front SolarCity expects to lower costs from $2.29 per watt in Q2 2014 to $1.90 by 2017. The goal is to be competitive with the grid even if the investment tax credit runs out by then.

Improving efficiency of teams like this are key to SolarCity's growth. Source: SolarCity

Changes are coming at SolarCity
A couple of other things investors need to watch are key strategic changes that are coming down the pipeline. Last quarter's conference call was the first time SolarCity's management has admitted that loans will likely be a big part of its future, which could change the company's value proposition. $2.32 per watt in long-term value will be tough to match when selling a system and a loan to homeowners, so watch how this strategy plays out.

The Silevo acquisition will also shift SolarCity's focus to manufacturing of solar modules. SolarCity can currently buy the lowest cost panels on the market, but by 2017 it plans to have its own manufacturing plant up and running, a huge strategy change and a risk to the business. Cost per watt, efficiency, and execution on the construction plans will be key to watch over the next three years.

Finally, management said on the conference call that SolarCity is moving toward lowering price escalators in lease agreements, even offering flat rates over the 20-year length of the contract. SolarCity's escalator averaged 1.61% in its most recent securitization deal and reaches up to 2.9%. I've been critical of these escalators in the past because they can potentially lead to solar energy being more costly than grid energy in the long term, which then puts customer value proposition at risk. I think a low escalator is the right strategy but it could lead to higher power prices in early years for customers.

Foolish bottom line
SolarCity has shown that it's capable of executing an incredibly aggressive growth strategy and lower costs to a level that's competitive with fossil fuels. That's what will keep the company ahead of competitors even if it changes strategy to offer more loans.

I think the stock is fairly valued at nearly a $7 billion market cap but if it continues to drop post-earnings it would be a nice buying opportunity for investors.