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SolarCity (NASDAQ:SCTY) was established in 2006 and has been involved in the designing, installation, sale and lease of its solar systems to residential, commercial, government and non-profit business segments. The company has also been involved with certain car manufacturers for the installation of vehicle charging systems with the collaboration of banks, such as Rabobank, after purchasing the SolSource Energy business from Clean Fuel Connections. In 2008 the company started a project of solar leasing which made its solar systems more affordable by enabling its customers to not pay the full amount upfront. Recently SolarCity acquired Zep Solar Inc., which was the supplier of photovoltaic modules mounting systems to the company. SolarCity has partnerships with different banks and corporations for the funding of different solar projects, including a partnership with Google, which funded $280 million worth of residential solar installations in June 2011. The company has a presence in 14 states with 31 operation centers.

Fundamentals

Last year SolarCity managed to show stellar growth of 376% in its share price, making it a very popular investment in the energy sector. The company started 2013 at $11.93 per share and closed the financial year at $56.82. However, the profits of the company were not reflecting the share price growth. SolarCity reported a loss of approximately $29 million in the third quarter of 2013, which is $14 million worse than the same quarter of 2012, even though total revenues showed growth.

(click to enlarge)

The company has also started working on back-up systems with Tesla Motors which will ensure the provision of energy to customers even if the solar systems are offline due to little or no sunlight - or there is a power outage. The reason for this move is to make customers independent of conventional electricity even if there is no sunlight for the solar system to produce energy from. The back-up systems are currently being developed for businesses only as the batteries are quite expensive and it will take residential customers years to cover their cost. The businesses are charged with electricity bills for the amount of electricity used plus the amount of electricity they need from the grid at a time (which are called demand charges). This new development will help SolarCity's corporate clients to decrease these charges as the back-up will provide the extra electricity required whenever they need and also by decreasing the dependence on conventional electricity, reducing the demand costs by 20%.

Expansion

SolarCity managed to outperform the market last year due to its rapid growth and is continuing this process. It has expanded its operations in Victorville, which was part of the plan to oversee 10 new operation centers in California by the end of 2013. The Chico center was another planned operation center in California and the company is opening new locations in Ventura, Livermore, Martinez, Morgan Hill, Murrieta, Petaluma, San Luis Obispo and Thousand Palms/Palm Springs in addition to the 13 existing offices which are expected to double the company's presence in the California region. These expansions are due to the high business volume of solar in this region, 75.4% of the residents installed solar panels during the last three years.

Acquisition

SolarCity has been integrating its business vertically (both upward and downward) with the acquisition of the firms responsible for its marketing and distribution in order to control costs and increase operating margins.

Back in September, the company managed to acquire the marketing firm Paramount Energy for a hefty $120 million, $116.3 million of which will be paid for in shares and the remainder in cash. Paramount had already been carrying out the marketing for SolarCity and this acquisition will help the solar company to reach out to even more customers with lower marketing expenses. For now the company has updated its guidance for 2013 to 278 MW which also accounts for the uninstalled customers of Paramount Energy.

Hayes Barnard, Paramount Equity CEO, said "Together, we'll develop the most sophisticated customer acquisition and installation system in the industry to provide one million customers with residential solar systems, forever changing the way energy is consumed, and at a lower cost."

Hayes Barnard joined SolarCity as Chief Revenue Officer after the acquisition was completed.

This was followed by the acquisition of Zep Solar Inc. in the last quarter of 2013. Zep Solar has a large presence in the rooftop mounting equipment industry and owns patents for designs that can assist SolarCity in lowering its installation costs. This acquisition was worth $158 million in stock and was fuelled by the objective of cutting down installation costs, which will increase SolarCity's customer base and improve the overall working efficiency.

"Without Zep it would take us two to three days to install a typical rooftop," SolarCity Chief Executive Officer Lyndon Rive said in an interview. "With it we're down to a single day and it looks better on the roof."

Both these acquisition will aid the company in achieving its target of 1 million customers or 6 gigawatts of solar systems installed in 5 year's time.

Insider Transactions

The following transactions are between the period of December 2013 and this month.

Trade Date

Name

Title

Shares sold

Value

2 Jan '14

John M Stanton

VP,P,EM

10,000

$578,634

20 Dec '13

Peter J Rive

COO, CTO

40,000

$2,240,656

12 Dec '13

Robert D Kelly

CFO

20,000

$1,006,424

11 Dec '13

Seth R Weissman

EVP

35,000

$1,811,145

6 Dec '13

John M Stanton

VP, P, EM

20,000

$1,083,644

5 Dec '13

John M Stanton

VP, P, EM

20,000

$1,030,273

Total

145,000

$7,750,776

Source: OpenInsider

There has been a high level of insider trading in the last couple of months and this only consisted of selling, rather than any purchase, of shares. This is not a good sign for the short-term performance of the shares.

Conclusion

SolarCity has been moving in the right direction through its acquisitions. It has managed to achieve a greater control of its equipment supply, which will result in reduced costs of materials and spur new advancements in solar panels, and also increased its control over direct marketing/selling. This will help the company to increase its customer base by tapping into unexplored segments of the market. SolarCity will be in a better position to analyze its customer's needs and expectations and may be able to increase its market share by covering the gray areas which other solar companies have yet to identify. In short, the company can reduce costs and increase synergy by having a greater control of its product from manufacturing till distribution. SolarCity's leasing of solar systems has been backed by Bank of America, Merrill Lynch, Citi, Morgan Stanley, National Bank of Arizona and U.S. Bancorp among others. Google has also funded $280 million worth of solar installments and with such strong partners SolarCity can certainly achieve stellar results. However, the selling of shares by the top executives of the company has raised some doubts about its promising growth. Therefore, while we are positive about the long-term outlook of SolarCity the shares are overpriced at these levels and investors are advised to take profits.

Source: Is SolarCity Overpriced?

Additional disclosure: Equity Flux is a team of analysts. This article was written by our Basic Materials analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.