By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 1/26/15 Sign up for Cabot Wealth Advisory—it’s free!
Solar City (SCTY) is already the largest provider of solar power systems in the U.S., providing clean power to tens of thousands of residential and business customers in 15 states: Arizona, California, Colorado, Connecticut, Delaware, Washington, D.C., Hawaii, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon, Pennsylvania, Texas and Washington.
In the second quarter of 2014, the company accounted for 36% of total U.S. residential solar installations in Q2 2014-more than the next 50 installers combined!
Someday (assuming all goes as planned), the company's photovoltaic installations will be in all 50 states. (That alone might be reason enough to convince you to invest.)
The company began operating in California in 2006 and has been growing rapidly since.
Revenues were $60 million in 2011, $127 million in 2012, $164 million in 2013, and are expected to top $253 million when 2014 numbers are released on March 17.
For 2015, analysts are looking at $461 million.
Which is all very impressive.
Still Losing Money
But the company has never had a profitable year, and for many investors who use screens, that's a deal-breaker. Traditional investment theory says you should invest in companies that are profitable!
Yet SolarCity is a horse of a different color, and once you understand the business, you'll find that it's quite normal that the company hasn't made any money yet.
In fact, the reason is simple.
In most cases, when SolarCity installs solar panels on a customer's roof, it doesn't sell them to the customer-it leases them, via a Power Purchase Agreement or PPA.
In this arrangement, the company owns the system, and the customer simply contracts to buy power at a fixed rate for years to come, leaving SolarCity the responsibility of maintaining the system (which they have incentive to do, because the more efficient the system, the more profitable it is for the company).
In 2013, 51% of revenue came from operating leases, while 49% came from outright sales. But late last year, the company rolled out a third option, financing. With options as long as 30 years and rates as low as 4.5%, this means homeowners now have three choices for how to pay for their systems-and thus more reasons than ever to install SolarCity's systems.
And the company is making great progress on the manufacturing side, as well. Last summer the company acquired high-efficiency solar panel manufacturer Silevo for $168 million in stock, $9 million in cash, and the assumption of $23 million in liabilities. Silevo was building a 200-megawatt module factory in upstate New York, and SolarCity plans to scale those efforts up to eventually build a 1-gigawatt factory in the state. The goal: to ensure that SolarCity has a ready supply of solar panels to supply its expansion efforts-and to become the most vertically integrated solar company in the world, the better to improve margins.
For all the company's success, its market penetration remains minuscule, under 1% in the markets it serves. Yet the momentum is impressive. At the end of the third quarter of 2014, the company had more than 168,000 customers, up 105% from over 82,000 the year before. And CEO Lyndon Rive commented, "At our goal of one million customers by mid-2018, we would have accumulated solar assets operating with an annual revenue run rate of over $1 billion contracted for 20-30 years thereafter and poised to grow even further."
Note: Lyndon Rive is the cousin of Elon Musk, who serves as the company's chairman (while also leading Tesla Motor and SpaceX), so it's not surprising that he's thinking big.
What About Oil?
And then there's the oil factor.
Everyone knows that oil prices have plummeted over the last year.
And all investors know that oil stocks have been terrible performers over the past year, with many stocks down more than 50% and some small-time explorers likely to go bankrupt this year.
Prices on alternative investment have also suffered as well. Everyone's thinking, "Why install alternative energy systems when oil is so cheap?"
But that's short-term thinking and investors in revolutionary stocks must think long-term. In the case of SolarCity, for example, it's almost certain that this short-term thinking will fade as investors remember two things.
Efficiencies of solar installations will continue to improve, thanks to both technological progress and efficiencies of scale.
Taxes on oil (the politicians are already scheming) and tax credits on alternative energy will continue to tip the scales toward alternative energy.
Thus the long-term potential for the industry remains intact, and SolarCity is most likely to be the industry's leader.
But we can't invest without looking at the chart.
SCTY came public in December 2012 at 8 and peaked at 88 nearly a year ago, in late February of 2014.
It then pulled back to below 46 at the end of April (a correction of 48%), rallied to 79 at the end of July, and now, thanks to the mass exodus from energy stocks, it's back down in the 40s. In fact, it hit 47 both in October and last week.
It's not a strong stock, and it's not a cheap stock, but it's a lot cheaper than it used to be.
Furthermore, the fact that the stock has repeatedly held support at 47, even though the news (oil prices) keeps getting worse, is a good sign.
Long-term, I think an investment in the stock is likely to work out very well. But I might be early, so the ideal way to play it is to wait for more signs of strength, so you truly know the bottom is behind it.
In the end, it's up to you. And if you're not comfortable with that responsibility, I suggest you take a look at my Cabot Stock of the Month, where I recommend one great stock to readers every month, and tell them exactly how to play it.
From Cabot Wealth Advisory 6/2/14 Sign up for Cabot wealth Advisory—it's free!
SolarCity is one of Elon Musk’s companies, the other two being Tesla Motors (TSLA) and SpaceX, the rocket company. That alone is not reason enough to buy it, but it does tell you management is creative and thinks big.
So let’s get right to the big part. SolarCity is looking to be the biggest solar power utility in the U.S. and possibly the world. Like many other companies, SolarCity will install photovoltaic panels on your roof. But unlike most other companies, SolarCity will do it for a very small cost.
Instead of paying big bucks to the company, you simply sign an agreement to purchase electricity (at a lower price than you’re paying your present utility) from SolarCity for decades. The company retains ownership of the panels, and its profits come from the difference between what you pay (month after month) and what SolarCity pays to the institutions financing its efforts. (They expect to profit, too.)
Revenues were $60 million in 2011, $127 million in 2012 and $164 million in 2013, so the trend is clear. Earnings are generally invisible, because the company is investing in growth today. Analysts estimate the company will lose $2.67 in 2014 and $2.20 in 2015.
But eventually profits will come, as installed systems outnumber sales efforts. And eventually, if management achieves its goals, SolarCity will be huge. Already, the company has inked contracts totaling $2.5 billion over time (up 97 % from last March) and its megawatts deployed are also booming, generally doubling in 2014 and 2015.
But SCTY today is a very volatile stock, so if you can get on board at a low point, you’ll be much more likely to hang on for the long-term.
And that’s why I’m featuring SCTY today.
The company came public in December 2012 at 8 and rode the great bull market of 2013 higher, interrupted by one 46% correction (ouch!).
But the uptrend resumed, with the stock hitting 88 at the end of February. But then came a disappointing earnings report, and then came the broad market’s takedown of all growth stocks, and 10 weeks later, SCTY was down 48%!
Note: The long-term prospects/potential for the company didn’t change a whit in that time. But the short-term fundamentals did, and the market environment did, and as a result, SCTY is now on sale.
But the long-term trend remains up, and there’s a ton of potential buying power in the wings, as SolarCity transitions from a money-losing start-up to a money-making utility that will eventually pay dividends.
So, you could buy here, remembering that this is not a normal Cabot growth stock recommendation or a normal Cabot value stock. It’s a “possibly-awesome buy while it’s down and hold forever stock.” If you’re comfortable with that, good luck.
Otherwise, take a look at some more timely short-term ideas in Cabot Top Ten Trader, which gives you 10 stocks every Monday with precise buy ranges. With the market shifting back into higher gear over the past couple of weeks, I’m optimistic the latest recommendation will do very well.
For details, click here.
|SolarCity Corporation (SCTY)
3055 Clearview Way
San Mateo, California 94402
|Index Membership: N/A
Industry: Semiconductor - Specialized
Full Time Employees: 4,262
6/2/14 SolarCity Corp. (SCTY): Looking to be the biggest solar power utility