Back in January, when SolarCity's (SCTY) stock hit $15 for the first time, we published an article with our views on Distributed Energy Generation. In that article our focus was to deconstruct the key arguments behind the predominant short views being published at the time of SolarCity's IPO.
At the time of writing, SolarCity's stock is at $19.27, up 141% from its IPO price.
Even after this very impressive performance we don't change our positive long-term views. We think we have here a stock worth to invest and keep for several years.
Why do we think this? Mostly because we think we can find in business history valuable and insightful comparisons about this new sector potential.
Once upon a time, there was another industry
· Completely dominated by its fixed infrastructure operators;
· Where concepts like mobility and personalization were totally unknown to the public;
· Where the distribution companies enjoyed monopolistic rents selling a commoditized service to a "proprietary" customer base.
It was a quite boring industry (except for the incumbents). Nothing truly disruptive happened in it for some time.
But one day, something did happen to this industry.
· Outsiders presented a new technology to users, based on still quite expensive (and only semi-autonomous) equipment. This equipment sale was subsidized upfront by these outsiders, as they were aiming to increase customer adaptation.
· Industry insiders received these technological novelties with a skeptical eye: the new equipment was expensive and not easy to install and use. Why would customers bother to change if the old fixed infrastructures could still deliver the required services, and at a better price?
· But some customers did adopt immediately this new technology. These pioneers wanted some immediate freedom from the fixed transmission lines, even accepting to pay a higher price premium to secure that.
· With increasing customer demand, the new technology kept improving and getting cheaper month after month, year after year. Terminals got smaller, better looking and less expensive. One day, they become affordable and attractive to everyone at the incumbents' customer base.
· What started to be a niche market for people that really benefited from improved autonomy, became gradually the most common platform for these services. It ended up condemning to structural decline the once mighty fixed transmission monopolies. The old monopolies reacted first angrily (trying to block the growing threat trough regulation) and then accommodating to change (acquiring or developing the new technology).
With further personalization, technological progress and autonomy, the outsiders gradually become the insiders for this industry, offering an increasingly bigger array of services, and establishing global footprints. They also learned to control the customer's relationship in a way the fixed infrastructure players were never able to do.
This historic account is a reminder about what happened to the telecommunications sector in the last 25 years. "Outsiders" were companies like Vodafone (VOD):
· It debuted in the London Stock Market back in October 1988 (under the previous name of Racal Telecom) - with a market cap of GB£1.7 billion and an established presence in the then incipient mobile UK market
·By July 2012 Vodafone it had a market capitalization of GB£89 billion, being established directly in 30 countries and with partner networks in other 40.
Our point is that this little tale, written in some years' time, may well be about the energy sector. And the great long-term opportunity lies in the fact that this story is starting ... now.
Technological progress is transforming now the energy sector the same way it transformed the telecommunications sector a couple of decades ago:
· Improvements on smart grids and decentralized energy solutions are starting to force change in the energy sector the same way the mobile revolution changed forever the telecommunications landscape;
· Solar Lease companies are offering the first commercially viable decentralized home energy solutions while subsidizing customers' entry cost. This is exactly the same strategy used by the first successful mobile operators;
· Firms like Solarcity are today catering to niches (even if increasingly larger): customers in very sunny areas, with high energy costs and/or strong state incentives. Cell phone operators also started by selling their phones to a niche of customers that saw outstanding value in being able to communicate everywhere and every time they needed. But technology evolved and eventually allowed everyone to jump in the mobile arena. In the decentralized energy sector, technology will also continue to evolve dramatically, thus also making possible a niche to mass market transition.
· Utilities will step up their regulatory blocking efforts (mostly by lobbying for ever increasing fixed power charges to pay for their infrastructures). But like the old telecom incumbents, they will gradually accommodate this alternative platform in their portfolios, or face structural decline.
· Finally, one must bear in mind that the current product offering of companies such as SolarCity - traditional solar panel leasing offers - is just the beginning of this process. The first mobile phones look today like they were from the Neolithic period. Future BIPV systems, that may come bundled with improving battery systems, will eventually turn the current solar panels into museum items. Ultimately, completely portable solar panels and individual energy systems will become ubiquitous. And companies with larger and better customer relationships (as Vodafone in the mobile sector) will be able to transition their clients to these new platforms and solutions, increasingly generating more revenues and profits. Mobile operators did that. Successful Distributed Energy Generators will also have to do it.
We don't think everything is comparable between the Telco and the energy sectors. Network effects will not help this transition in the energy sector - they were important in the Telco business. So without these network effects, the speed of transformation may end up being a little slower. But on the positive side, when the mobile revolution started, mobile usage was more expensive than the fixed lines alternative. The current solar leasing offers already save money to the signing households.
We think this analogy brings some light on how this new sector may evolve. We believe Distributed Energy Generation is a great long-term bet. SolarCity seems poised to become one of the winners - first nationally and then globally - of this exciting infrastructure revolution.
So next time you think about Decentralized Solar Energy ... think Vodafone 1988
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.