As the solar industry grows, it's curious that stocks seem to ebb and flow more with oil prices than with the industry's fundamentals. As long-term investors, Foolish investors need to pay more attention to fundamentals in a business than the market's whims, which is why a conference call is a great place to get information about a company, straight from management.
SolarCity Corp's (NASDAQ:SCTY.DL) management team recently talked with investors about its second-quarter results, and here's what I took away from the call.
This is two companies in one
As we look at our business, we essentially have two companies in one. We're a development company and a power company. The development company is responsible for acquiring customers and getting solar systems installed. The power company provides the financing and collects 30 years of recurring revenue for selling the energy.
-- Lyndon Rive, CEO
A transition to thinking about SolarCity as two companies rather than one has been coming for some time. Management needs to have a way for investors to think about its sales and installation operations differently than its ongoing cash generation machine. Rive calls these the "development company" and the "power company."
Going forward, financial results will be stated in a way that's consistent with this view, and hopefully, it will make it easier to analyze the company.
More growth is coming
This quarter we booked 395 megawatts. Our previous record was 237 megawatts. We installed 189 megawatts, another record for us, 77% year-over-year growth.
SolarCity has been proud to tout the fact that it's nearly doubled installations every year as a public company. This year, it made the promise that installations would reach as much as 1 GW, so the pace of bookings is important for investors.
The number I would focus on is 395 MW of bookings for the quarter. That's an incredible pace and sets the company up well to hit larger growth goals. But 77% installation growth is actually slowing from previous quarters, something investors should begin watching.
The 1 million customer goal is on target
We have 262,000 customers, adding over 44,000 customers this quarter, and 86% growth year over year. We're well on our way to achieve our 1 million customer goal. We added $1.6 billion of normal contracted payments with a total of $7.7 billion.
One of SolarCity's big milestone goals is 1 million customers by mid-2018. Management still thinks that's achievable, and the contracted payments that will be associated with a customer base like that are incredible, as shown by the $7.7 billion in contracted payments after reaching just over a quarter of its goal.
Entering an important new market
I'm excited to announce that we're going to be entering the small and medium commercial markets. This is a massive market that has been neglected by the solar industry.
The commercial solar industry, especially on a small scale, has been tough for solar companies, because these customers typically have lower electricity costs (on a per-kWh basis) than residential customers, and counterparties may not have high credit ratings.
What SolarCity is saying here is that it's cut costs far enough so that it can be competitive, and it's finding ways to access funding that will make commercial systems viable. This could become a big portion of SolarCity's business, so watch how small- and medium-scale commercial solar evolves in coming quarters.
Future returns should be strong
The NPV on a per-watt basis was approximately $1.14 per watt, suggesting a range of approximately $1 billion-plus of annualized equity value creation in 2015 based on our megawatt guidance. If we run this very same model applying the expected impact of a 10% ITC in 2017 with our 2017 cost goal, we would still maintain healthy unlevered IRRs of approximately 7.5% and an equity NPV of roughly $0.60 per watt.
-- Brad Buss, CFO
Based on SolarCity's models, the net present value of the projects it installed in the second quarter was $1.14 per watt. That's a solid return considering that total costs were $2.91 per watt. But more important is where the company stands after the investment tax credit (ITC) falls from 30% to 10% for commercially owned systems in 2017. Management calculates that it would still have a positive internal rate of return and an NPV of $0.60 per watt, even if the subsidy were reduced today, so by 2017, further cost reductions should increase those returns.
When will the market see more than oil prices?
Despite this growth and an improving solar market, the stock market appears to be more focused on oil prices than anything else, even if solar energy doesn't compete with oil head to head. So, that's another thing for investors to keep an eye on. But it's good to know that SolarCity is executing as it has said it would and is still on target to reach an incredible 1 million customers by the middle of 2018, which is more important than oil prices over the long term.