Quarterly conference calls offer a great opportunity to get into the heads of the people who run the companies we own. Management usually discusses how its business is doing and then takes time to answer analysts' questions.
SolarCity's (NASDAQ:SCTY) latest call offered management the opportunity to tell investors about what is going well and what isn't. Here are a few takeaways from management's comments on the third quarter, a period in which growth wasn't as explosive as expected and retained value dropped significantly.
SolarCity is dominating residential solar
Our market share continues to grow. With our vertical integrated model, it allows us to invest into our people and to our products. We have the best looking systems at the lowest cost. We've gone from 11% to 36% in less than three years. Our residential division is now larger than next 50 competitors combined.
-- CEO Lyndon Rive
This is really the story behind SolarCity. The company is growing along with the residential solar market, but it is also stealing market share at an extremely rapid rate. SolarCity has managed to almost double the amount of megawatts its deployed every year since 2010 and is targeting a deployment of 920 MW to 1,000 MW in 2015. By reaching this target, it would double its installation count again compared to 2014 numbers.
To sustain that incredible growth rate, management will have to cut costs and innovate at a rapid rate, which it is already doing.
Costs are falling fast
We IPO'd a cost structure of $3.93 a watt.
-- CEO Lyndon Rive
Over the long term, SolarCity's growth must be driven by low costs. The company is beginning to see stronger competition from the likes of Vivint Solar (NYSE:VSLR) and SunPower (NASDAQ:SPWR) in the residential market, and as they grow, system and lease prices will likely come down. The only way to maintain margins is by continuously lowering prices.
The good news for shareholders is that SolarCity has a hyper focus on cutting expenses: nearly every major move management makes is intended to wring out more costs. Getting into module manufacturing, owning a racking company, and owning the sales network are all part of this effort, which is key to keeping the company competitive.
SolarCity isn't worried about a post-ITC world
So one of the first questions I get from people is, what happens to the business post the planned ITC step-down in 2017? My answer is, it's really business as usual. ... [Reaching] our target of $2.50 in 2017 will allow us to drive very healthy profits and return through the long run with NPVs greater than $1 per watt.
-- CFO Brad Buss
In 2017, the federal investment tax credit that effectively pays for 30% of a solar installation's cost will expire. When it does, SolarCity will have to adjust to the new market realities and will likely see a major impact on prices and/or demand for its solar products.
But in many ways, SolarCity is already preparing for this outcome. Securitization, solar bonds, and a new solar loan product are all meant to diversify both financing and product offerings for the post-ITC world. The question then becomes whether demand persists after the tax credit expires. So far, management isn't worried that demand will wane.
...We're just in the infancy of a long ride. So if you take a look at the retained value that we're talking about and look at growth rates in the future, it's pretty amazing. So all I'd say is buckle up, it's going to be an amazing ride.
-- CFO Brad Buss
Buss is a new member to SolarCity's management team, yet he gave maybe one of the most glowing endorsements of the company. Even after doubling installations every year since 2010, the potential is still very high for future installations.
The underlying reason Buss and SolarCity are so bullish is that solar energy accounts for less than 1% of electricity in the U.S., meaning potential for growth is almost unlimited.
Investors shouldn't watch retained value per watt
The incremental unit is not the unit that one should be looking at. One should be looking at the total retained value. Because what's important is how many dollars are we collecting? On the dollars per watt, I don't think that's the metric. If you had the choice of deploying 2x the megawatts, but at a 20% less retained number, it would be wise to do that.
-- CEO Lyndon Rive
One issue SolarCity faced this past quarter was a significant drop in retained value per watt. Second-quarter retained value of $2.32 per watt was well above the $1.72 reported in the third quarter, which might indicate greater competition in the latest reporting period.
As he has done before, Rive turned the focus to overall retained value added. This is an important metric, but it should also be compared to operating costs to obtain that retained value and the risk in assumptions built into retained value. Investors should continue to watch retained value per watt because it gives a peek into the profitability of each installation. Over a long period of time, I would be surprised if that figure doesn't continue to fall.
Travis Hoium manages an account that owns shares of SunPower and is personally long SunPower shares and options. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.