SolarCity, Crowdfunding And 1 Million Customers

| About: SolarCity Corp. (SCTY)

Now that 2013 has come to a close, let's look at some of the early solar statistics. From the Federal Energy Regulatory Commission's November 2013 "Energy Infrastructure Update," the following electrical generation capacity was added to the US grid (January 2013 through November 2013 cumulative):


New megawatts placed in service

Natural Gas










All other sources




So solar accounted for 20.6% of new electrical generation capacity through November 2013. Total installed capacity in the US is 1,160 GW; solar capacity is just 0.6% of that (7.11 GW). Conclusion: solar provides a tiny fraction of our electrical power, but it is growing quickly.

The Solar Energy Industry Association released this chart of utility/commercial/residential solar installations. Utility-scale installations comprise the largest share of new solar capacity at around 57% of the total. Residential and utility-scale installations are becoming more common, as commercial installations decline slightly.

SolarCity (NASDAQ:SCTY) has been leading the charge on residential installations, and it is the focus of this article. Not only is SolarCity the largest residential solar installer, but its market share has been growing. In Q3 2013, SolarCity installed 32% of residential capacity (CleanTechnica).

To finance their growth, SolarCity is launching a website that will allow individuals to invest directly in its projects. The plan has been lauded by the market as its stock is up 10% since the announcement. VP of Financial Products Tim Newell said that the new platform would reduce the company's cost of capital.

Now I want to address the very legitimate, smart question from Seeking Alpha commenter "tstreet":

"Until someone can adequately explain the SCTY business model, it would appear that it is similar to a Ponzi scheme. In part, the residential market may be fast growing because customers are getting value that doesn't pencil out when you consider the total costs incurred by SCTY."

I think the best insight comes from studying the similar crowdfunding model of SolarMosaic. Mosaic has provided crowdfunded solar since January 2013; it was jumpstarted with a two million dollar grant from the Department of Energy. Individuals can invest as little as $25 into a solar project and get paid back with a monthly payment plus interest. Generally, the terms on Mosaic's notes are about 12 years and the yields range from about 4% to 7%. So far, $6.8M has been invested and 100% of the monthly payments have been on-time. SolarMosaic has shown that it is possible to make money from solar power.

Generally, Mosaic's projects are much larger than the residential installations that SolarCity is known for. Mosaic projects have ranged in size from 35kW to 12.3MW, whereas the average SolarCity project is about 6kW. Certainly the larger projects have lower labor costs, and the customer acquisition costs are probably lower. On the other hand, Mosaic has some unique costs that SolarCity doesn't need to worry about. I imagine that the process of screening projects is much more difficult, and Mosaic needs to write a custom prospectus for every project it offers. Finally, since Mosaic is doing one-off projects, their engineering expenses may be higher.

Overall, it is not clear whether Mosaic or SolarCity has lower costs. I'll assume that SolarCity and Mosaic are equally profitable. That allows me to perform a back-of-the-envelope calculation of SolarCity's value, and also of the capital cost that such growth will require.

Here are my assumptions:

  1. SolarCity's annual yield is 5.5% (right in the middle of what Mosaic investors earn).
  2. SolarCity achieves its goal of one million residential installations by January 2018.
  3. The average size of a residential installation remains 6kW.
  4. The average installed cost/Watt holds steady at $3/Watt.
  5. The cumulative installations grows linearly with time, starting in January 2013 and ending in January 2018, i.e. SolarCity makes 16,667 installations per month over that five-year period.


Each month SCTY requires this much capital for 16,667 installations:

  • 16,667 installations*6000 Watts/installation*$3/Watt = $300 M
  • At the beginning of 2018, the $300M capital from January 2013 will be worth:
  • $300M*(1.055)^(60 months/12)= $420.8 M
  • At the beginning of 2018, the $300M capital from February 2013 will be worth:
  • $300M*(1.055)^(59 months/12)= $418.4 M

And so on through January 2018. I built a spreadsheet to calculate the total capital cost over 60 months, and the final value at the end. The results:

  • SolarCity will require $18.3 B of capital to reach its million-customer goal.
  • SolarCity's capital investment will have appreciated to $21.8 B at the beginning of 2018.

Overall, the appreciation of the capital over five years isn't particularly impressive. 21.8B from 18.3B is only a 19.1% appreciation over this five-year period. However, solar panels typically last twenty years or longer. After another fifteen years, the value of that $21.8 B will have grown to $48.7 B (21.8*1.055^15). It's also interesting to note that SolarCity would be supplying 0.52% of the USA's total electrical capacity (6 GW) if events proceed according to these assumptions -- still a tiny fraction of the addressable market.

Granted that was quite a few assumptions, but they were necessary in order to get a handle on the problem. Note that some of the assumptions were conservative, i.e. cost/Watt was assumed constant over five years, while we know that the cost of photovoltaics will almost certainly decrease. Other assumptions were not conservative; for example, there's no guarantee that SolarCity will achieve its goal of one million customers. I also neglected other segments of SolarCity's business, such as PV for the military and electric vehicle chargers.

SolarCity forecasts a retained value of $1.37/Watt, so the one million customers should give the company a retained value of ($1.37/W*6 GW) $8.2 B. That's 24% more than the company's present market cap of $6.24 B.

I hope these numbers help you make an informed investment decision. I haven't made up my mind yet whether this analysis was positive or not; I'm eagerly awaiting more details on the platform.

Even with a ~5% yield, SolarCity shouldn't have much trouble raising $18 B. While 5% sucks compared to the average return from the stock market, it beats a bear market and it beats most dividend stocks. SolarCity's new investment platform should appeal to risk-averse investors and dividend growth investors. If SolarCity can do better than 5.5% then (I have no doubt) the retail offering will be extremely popular.

SolarCity previously offered notes to institutional investors, which pay 4.8% and mature in 2026. The notes were rated BBB+ by Standard & Poor's, denoting "Adequate capacity to meet financial commitments, but more subject to adverse economic conditions."

Disclosure: I am long SCTY. 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.