SolarCity installation at the Maui Arts Cultural Center. Source: SolarCity.
SolarCity (SCTY.DL) has taken the residential solar industry by storm over the past five years. In that time, it's gone from a start-up with very little in assets to a powerhouse with one of the largest market capitalizations in the industry, at $5.6 billion.
It's no secret SolarCity has built its value by increasing the number of solar systems it installs at an extremely rapid rate. In 2010, it deployed just 31 MW of solar systems, and in 2015, it anticipates building 900 MW to 1 GW of solar systems.
The amount of money that goes into building that much solar is incredible, and a look into SolarCity's financial statements shows how the company will keep building value for years to come.
An investment now for a payoff later
What's unique about SolarCity's business is that it's making thousands of small capital expenditures that will pay off for 20-30 years into the future. As these systems age, they're depreciated over 20-30 years, depending on their useful life. When looking at a company like SolarCity, if the investment made in capital expenditures is higher than the cost associated with depreciating older solar systems, we should expect growth in revenue and, potentially, earnings (which I'll cover below).
In SolarCity's case, it's investing so quickly in new projects that depreciation is barely a blip on the radar. Using data from S&P Capital IQ, I've built the chart below, which shows just how fast capital expenditures are growing and how they outpace depreciation. What's incredible is that SolarCity invested $1.68 billion in solar systems between 2009 and 2013, and in the next two years, they're expecting to double installations yet again.
Data source: S&P Capital IQ. Chart created by author.
Investment in capital expenditures is clearly driving SolarCity's growth, and at the current pace, it will do so for many years to come.
Why massive growth hasn't led to big profits
What's interesting about SolarCity is that massive growth hasn't led to profits yet. In fact, the company is losing hundreds of millions of dollars as it builds out an industry-leading solar business.
SCTY Revenue (TTM) data by YCharts.
But the payoff for building solar systems doesn't come overnight. Through the second quarter of 2014, SolarCity has built up $3.3 billion in contracted payments from customers. These payments will generate the return needed to make previous capital expenditures profitable.
Future capital expenditures may come crashing down
One of the changes to watch with SolarCity's capital expenditures going forward is the level of capital expenditures each quarter. SolarCity recently announced a solar loan program called MyPower, which will transfer the ownership of the solar system from SolarCity to the homeowner.
This will lower capital expenditures, but it could increase return on existing capital. That's because the only capital expense going into a solar system sale will be the equipment used to build the system (i.e., the trucks).
While this may lower capital expenses over the next five years, it could actually have a positive impact on the income statement at the same time.
A growth story that's just begun
SolarCity is part of a rapidly growing and evolving solar industry, so it's a fast-changing business for investors to analyze. But you can see that its rapid capital expenditure growth has helped fuel the overall business's growth, and we should see installations continue to grow in the future.
Keep in mind that not every solar system is the same, and as SolarCity transitions to loans, it may increase short-term value at the expense of long-term return from capital expenses.
At the end of the day, capital expenses versus depreciation is just one way to measure SolarCity's growth, and investors need to consider other components, like growing MW deployed, retained value, and gross margins when looking at SolarCity. But there's no denying that this is a fast-growing company with a bright future in solar.
