SolarCity Corporation (NASDAQ:SCTY) had arguably its worst year as a public company in 2015. It didn't meet its own growth expectations, costs spiked, and short sellers brought up questions about the company's counterparty risk. Amid the challenges of the year, there were two that stood out as long-term problems for SolarCity.
Cost spiral out of control
In any business there's a balance between growth and the cost to attain growth. For SolarCity, that balance came to a head in 2015 and management pushed too hard, and costs spiraled out of control.
Between Q3 2013 and Q3 2015 the cost to sell solar systems jumped from $0.40 per watt installed to $0.64 per watt. That's surprising because costs should be falling and SolarCity hasn't been able to manage those costs.
The real reason costs grew so quickly is that SolarCity was too focused on growth. The company has long doubled installations every year, when you reach a certain scale, though, growth rates like that become harder and harder to attain. SolarCity had to put more sales people in the field and pay third parties more for leads, making the systems less and less profitable. The bad move was thinking that growth was more important than costs.
The question for SolarCity now is how much can it grow and how much will that growth cost? Areas where solar sales make a lot of sense, like Southern California, are becoming more and more saturated making each sale more difficult. So the tug of war between growth and costs will continue. And losing one major state might not be a good sign for the future.
Moving deeper into Nevada
It seem logical that Nevada should be a big solar state. There's plenty of sunshine and retail electricity costs are above the national average. But a recent ruling by Nevada regulators cut the price the utility will pay for electricity from homes with solar and puts additional fees on them as well. The result was SolarCity ceasing all sales and installations in Nevada and since the rules are retroactive the systems already installed may now lose money.
All of this happened less than a month after SolarCity opened a regional workforce training center in West Las Vegas and reached 2,000 people on staff in the state. The training center may stay, but installation and sales workers will have to either be relocated or laid off.
Nevada has had a tumultuous relationship with residential solar and what's backfiring for SolarCity is the hiring and installation it so rapidly invested in. Instead of an opportunity, that expansion is now turning into a cost and that will put even more pressure on growth in other states.
2016 is full of opportunity and risk
When looking into the next year there are a lot of question marks for SolarCity. It was certainly a positive for the company that the investment tax credit was extended, which helps make solar more economical versus the grid. But the ITC extension doesn't answer the questions about sales costs or what customers in Nevada will do now that their solar systems are effectively more expensive than what they were sold. There's also a lot of competitors moving into SolarCity's market, which could put pressure on margins.
SolarCity has to execute on a lot of fronts in 2016 and some of their missteps in 2015 will weigh on the mind of investors. If it's able to turn last year's challenges into strengths the stock could shoot higher and if they turn into persistent problems the opposite could be true.
Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.