SolarCity (NASDAQ:SCTY.DL) has been a hot stock since it came onto the market in late 2012. It's ridden a massive growth wave in the U.S. solar industry and it's also taken share by innovating and cutting costs faster than competitors.

But as with any high-flying stock there are great expectations built into SolarCity's stock price. Here are the three risks that could bring SolarCity stock tumbling down.

Growth doesn't live up to expectations
SolarCity has set an incredibly high bar with its current growth rate. Since 2010, the company has doubled installations every year and expects to nearly do the same in 2015. The challenge is that investors start to think that growth will occur forever and when you slip up even the slightest bit your stock can take a hit.

Source: SolarCity

After saying it would be at the low end of previous 500-500 MW guidance in 2014 we saw that maybe doubling won't last forever. Plus, there's a looming cloud on the horizon when it comes to SolarCity's growth. The investment tax credit, which gives homeowners or investors a tax credit that covers 30% of the cost of their solar system, expires in 2017 and if it's not extended there will be a huge impact to SolarCity. Either the company will have to lower prices to offer the same energy rates to customers as it offers today, lowering margins, or raise prices to maintain margins. Either way, it'll impact either growth of MW or growth of overall value creation by reducing value per watt.

When companies have set and exceeded lofty expectations the market only raises the bar, it doesn't lower expectations. If SolarCity doesn't keep growing, and profitably, the stock could drop significantly.

SolarCity is developing new racking to expand in the commercial solar market. Image source: SolarCity

Value isn't what it seems
The most underappreciated risk to SolarCity is in the way it has structured leases and calculated retained value -- its measure for value creation.

On the lease side, SolarCity has structured leases or power purchase agreements with customers that often include annual cost escalators. In a recent conference call, management covered its pricing strategy of offering an initial rate for each kW-hr of electricity and then escalating that price 2.9% each year.  

If a customer is offered a $0.15 per kW-hr initial rate versus an $0.18 per kW-hr from the utility it seems like a no brainer that solar will save them money. But the escalator quickly adds up. In 10 years the cost of electricity will be $0.20 per kW-hr and by year 20, the final year of the initial lease, the cost is $0.266 per kW-hr.

If grid utility rates grow faster than 2.9% that's not a real problem, but as I highlighted earlier this year long-term rates have grown more slowly than 2.9% since as far back as 1980. Recently, some states have even seen rates decline.

This is key because if solar energy isn't cheaper than grid energy there's no value add to the customers. Existing customers could revolt, defaulting or renegotiating agreement, but the bigger problem is when a home is sold. 

On average a home is sold every 12 years, and homeowners who buy a home with a solar lease or PPA have the option to simply have SolarCity take the system down. At the time of purchase, if the cost of solar energy from the SolarCity system is higher than the cost from the grid -- or building a new solar system through a new lease or PPA -- the homeowner would be smart to just walk away.

There's not enough data to suggest that customers will or won't default on leases but if grid costs are lower than lease costs there could be a revolt. SolarCity's $2.2. billion retained value calculation assumes everyone pays what they owe for 20 years and new homeowners gladly take leases off sellers' hands. That's a very rosy assumption given the fact that we don't know what solar customers will do in 20 years.  

The bigger red flag is that SolarCity assumes that customers will renew leases at an equivalent of 90% of the terms at the end of the lease. So, SolarCity is assuming that 100% of customers will renew for 90% of what they paid in the 20th year of the lease.

SolarCity commercial installation on eBay's headquarters. Image source: SolarCity

This is absurd for a number of reasons. First, the cost of solar will fall dramatically between now and 20 years from now, so it would be more economical to just ask SolarCity to take the system down and get a new solar system for a lower cost. Second, it's not cost efficient for SolarCity to take down a solar system after 20 years, so it would likely just give the system to the homeowner (which a former SolarCity rep told me was part of his sales pitch). Why in the world would SolarCity go to the expense of taking a system down if there's no scrap value (which there isn't)?

SCTY Chart

SCTY data by YCharts

The bottom line here is that SolarCity's $2.18 billion in retained value includes some very rosy projections, which aren't likely to come true. Since this is the number investors are using to value the stock the entire investment thesis could fall apart if projections turn out to be incorrect.

Making solar panels is risky business
The final risk is that SolarCity won't be able to execute on its lofty 1 GW solar panel manufacturing plans by 2017. Building a solar panel plant is not a trivial task, even if the State of New York is paying for it.

Silevo's Triex technology is at the heart of SolarCity's expansion into panel manufacturing but we've seen differentiated cell technology fail in the commercialization process before. Evergreen Solar, Energy Conversion Devices, and Solyndra were just a few of the companies who said their technology could lower costs and improve solar performance. Now they're all bankrupt, so the risk of going into manufacturing is high. 

Since SolarCity is beating competitors on cost by pennies it's critical they execute on the manufacturing plant and if they don't it could undo hundreds of millions in value already built on the balance sheet. I don't think this is the slam dunk most investors think it is. 

At the current stock price, I don't think SolarCity represents a poor risk/return profile for investors, but they need to understand where SolarCity's business can go wrong. It's built billions of dollars in projected value but that includes very favorable assumptions, and management has made a very risky move building a massive solar panel plant. Failing to execute on any of these plans could sink the stock in a heartbeat.