Solar Stocks – SolarCity Rides the Wave in Rooftop Solar

SolarCity dominates the residential solar market in the U.S. with its solar loan model

The solar industry has been in the limelight in recent years in light of global environmental concerns and the governments of various countries turning to renewable energy sources, the cheapest of which is solar power. Giving a fillip to the solar industry, the U.S. government has recently launched Phase 1 of the much awaited Desert Renewable Energy Conservation Plan, which aims to foster development of renewable energy, especially solar and wind projects, as part of its ambitious Climate Action Plan to permit 20,000 MW of renewable power by 2020. We turn the spotlight to SolarCity Corp. (NASDAQ: SCTY), which has brought about a transformative change in residential solar systems.

s1SolarCity, founded in 2006 and headquartered in San Mateo, California, sells renewable energy. The Company integrates the sales, engineering, installation, monitoring, maintenance and financing of its distributed solar energy systems. It offers long-term energy solutions to residential, commercial and government customers. It offers its customers the option to either purchase and own solar energy systems or to purchase the energy that its solar energy systems produce through various contractual arrangements. The Company’s products, services and technologies include solar energy systems, customer agreements, grid control/energy storage systems, Zep solar mounting systems and software.

s2SolarCity’s wholly owned subsidiary, Zep Solar Inc., licenses its Zep Groove technology to photovoltaic module and power electronics manufacturers, and supplies the Company with complementary mounting and grounding hardware. It also sells proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. The company offers its products and services through direct outside sales force; door-to-door sales force; call centers; channel partner network; and robust customer referral program. SolarCity currently serves customers in 15 states and the District of Columbia.

In 2016, SolarCity had to battle falling costs for residential solar systems, rising costs to sell solar-power systems, and higher financing costs. However, the Company’s transformative product, solar leases or power purchase agreements (PPA), is seen to drive revenues over the next few years. PPAs have been the dominant financing method for rooftop solar sales and allow customers to install solar on their roofs in lieu for a 20-year agreement to buy energy from SolarCity with nil down payments, thereby enabling them to save on their energy bills.

Source: SolarCity
Source: SolarCity

SolarCity’s first solar loan product, named MyPower, was a failure, largely because it was complex and had a bill based on energy production. Earlier in 2016, SolarCity started selling solar loans to customers, which is seen to spur revenue growth. Loans are as short as 10 years with a 2.99% interest rate or as long as 20 years with a 4.99% interest rate. SolarCity gets cash up front and does not have to take on the financing risk that a lease or PPA comes with. Also, SolarCity’s gets all of the revenue from building the solar-power system upfront, which could help it generate cash flow far more quickly than the lease/PPA model.

Solar loans are seen to be a win-win deal for customers as well, since they can take advantage of tax benefits and the solar-power system becomes an asset when they sell their home. Over the next few years, SolarCity may emerge as a solar loan company, which would be a huge differentiating factor from other solar power competitors.

Source: SolarCity
Source: SolarCity

Despite climbing revenue, a major concern for SolarCity is that its operating and installation costs are growing steadily. Another cause for concern is that solar-cell prices have fallen 70% since 2010 due to expansion in production capacity outpacing the growth in demand. Moreover, SolarCity faces intense competition from larger Chinese firms in terms of technology and leverage on cheap labor and cost-effective operational set-up. Hence, the Company will need to innovate in areas including metallization, cell architectures, and kerfless wafering to keep up with the tough competition and gain an edge over its Chinese counterparts.

s5Acquisition by Tesla Motors

On August 1st, 2016, carmaker and energy storage manufacturer Tesla Motors Inc. (NASDAQ: TSLA) signed a definitive agreement to acquire SolarCity for $2.6 billion in an all-stock transaction, subject to a shareholder approval. As per the agreement, SolarCity’s shareholders will receive 0.110 shares of Tesla for each share of SolarCity at $25.37 per share value. Tesla’s acquisition of the largest residential solar energy installer and generator in the U.S. along with its unique panel technology will help it gain synergies in product innovation and integration. The transaction is expected to close by Q4 FY16 and is seen to be a strategic fit to Tesla since it manufactures and sells energy storage products for commercial and industrial applications.

Bright industry outlook

On a final note, the industry has a bright outlook given that the fact that the world is facing a huge gap in the demand and supply of electricity to cater to the needs of the burgeoning global population. Moreover, the governments of various countries across the world have implemented many regulations for the usage of green energy, thereby making solar power an ideal choice. In addition, the falling cost of solar installations augers well for the growth of the industry in the next few years. Solar installations could emerge as the main source of power supply in many emerging nations such as Africa and Southeast Asia where the electricity infrastructure is not so good. Another major advantage for the industry is the availability of government subsidies for installation and manufacturing operations.

Source: BNEF, Bloomberg
Source: BNEF, Bloomberg

Solar energy projects are anticipated to garner investments of $3.4 trillion through 2040. In many regions, the lifetime cost of wind and solar is lesser than the cost of building new fossil fuel plants, and that trend is expected to continue. However, analysts have predicted that by 2027, building new solar fields would become cheaper than running the existing coal and gas generators. Moreover, over the next 25 years, 68% of the new electricity capacity will be in the form of renewable energy.

In 2014-2015, the solar industry witnessed a recovery phase where the major players experienced revenue and valuation growth fueled by improved investor confidence. This growth was fuelled by U.S. legislative activity, E.U. capping Chinese sales, and the Chinese government’s restriction on the construction of new solar factories, and is expected to continue through 2017.

Stock Performance

s7SolarCity’s stock ended the day at $18.35, gaining 6.50%, at the close on Tuesday, September 20th, 2016, having vacillated between an intraday high of $18.73 and a low of $17.06 during the session. The stock’s trading volume was at 5,163,860 for the day. The Company’s market cap was at $1.80 billion as of Tuesday’s close.

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