SolarCity's Energy Sales Are Like Diamonds In The Sky

| About: SolarCity Corp. (SCTY)

By the time you finish reading this article, SolarCity (NASDAQ:SCTY) likely signed up another customer. According to CEO Lyndon Rive, a new customer is signed up on average every five minutes. On March 6, 2013, SCTY released its 4th quarter and 2012 results, a first earnings report since its IPO. Q4 sales were up around 22% and the net loss was large but expected.

In my first article on SCTY entitled SolarCity Shines Bright Like A Diamond, I covered what I like about the business model and why I believe it will ultimately prosper. This follow up article (also with a title borrowed from Rihanna's Diamonds son lyrics) gives some analysis on how the results are beginning to show confirmation and validation of the business. My investment thesis and focus on SCTY centers around the electricity generated and sold back to SCTY's customers rather than any short-lived revenues generated from equipment or lease sales. The solar energy is sold back to the customers who've allowed SolarCity to install the equipment directly on the residential or commercial location, essentially creating a mini solar farm, which the customers buy energy from directly and at much lower costs to SCTY than traditional solar farms. This creates a highly profitable and long-term recurring and always growing revenue stream that will ultimately make SCTY unique in the solar energy space and reward shareholders handsomely.

Q4 showed a YOY nearly doubling of sales to over $14 million. Gross profit margin was an astonishing 66% with gross profit of $9.3 million. More interesting to me is that energy sales now account for more than half of revenues (versus around one-third a year ago). SCTY now officially earns the majority of its revenue and two-thirds of its gross profit from energy sales. I expect this to grow more pronounced each quarter ahead, and the street will take notice and be able to comprehend better with solid numbers the validation of the business model. Investors will see very clearly that as its recurring energy sales grow, its gross profit accelerates with most of it falling straight to the bottom line.

In the follow-on conference call, CEO Lyndon Rive stated:

We are clearly on our way to building the most compelling energy company in the 21st century.

These are strong words, which I agree with. Keep in mind there's always risk of superior competition coming on line or a severe drop in fossil energy prices, either of which could severely hurt SCTY's prospects. The future looks very bright for SCTY, but it must continue to execute well for its gross profits to rise enough to overcome its net losses and eventually prosper. Rive further mentions

in order to achieve our vision, there may be massive investment into deploying solar energy system.

For investors, I believe the risk will be well worth it as each new customer generates yet another predictable, recurring, highly profitable revenue stream going forward. As long as new customers continue to be signed up, the gross profit will inevitably grow to large enough levels that allow investors to prosper.

So far 2013, it looks like growth will continue to escalate. The earnings PR and CC forecasts a 64% jump in 2013 over 2012 in MW deployed, with a very large portion of that already backlogged. During the CC, CFO Robert Kelly gave encouraging words further solidifying expectations of profitability in the future:

When the operating lease revenues build up over time and exceed your gross capital, you will achieve GAAP profitability as the volume increases on our books. In fact, the profitability if we slow down our growth, the GAAP profitability would incur much faster quicker.

I believe each new customer of SCTY will bring it closer and closer to profitability. Each new customer means new checks will be written to SCTY, basically forever, at very little going-forward cost just from absorbing the sun's rays and selling the converted energy right back to the customer underneath, unlike many other solar companies that only make revenues from equipment or from expensive solar farms. For SCTY investors, the sun's rays are like diamonds in the sky.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.