SolarCity: So Far So Good

Feb.25.14 | About: SolarCity Corp. (SCTY)

On Monday evening, SolarCity (NASDAQ:SCTY) announced its results for the fourth quarter and the full-year of 2013. The company was only able to announce its non-GAAP results as the GAAP results will take another week to prepare due to the company's recent acquisitions.

For the quarter, SolarCity generated $47.3 million in revenues, which represents a growth of 87% over last year's $25.3 million. For the full-year, the company generated $164 million in revenues, up from $128 million in 2012. This represents a growth of 27% year-over-year.

In the beginning of the year, SolarCity had 4 major goals to accomplish in 2013. These goals were: 1) deploy at least 250 MW, 2) reduce cost per watt significantly, 3) reduce cost of capital, and 4) achieve positive cash flow by fourth quarter. The company accomplished all of its goals as it deployed 278 MW, reduced its cost-per-watt by 30%, made great progress in securitization of distributed solar assets and achieved positive cash flow in the fourth quarter of the year. Overall, it was a successful year and successful fourth quarter for SolarCity. Acquisition of Zep, implementing cost-cutting measures and leveraging economies of scale was beneficial for the company's finances during the quarter.

In the fourth quarter alone, SolarCity deployed a total of 103 megawatts. Of this number, 70 megawatts came from residential deployments and 33 megawatts came from commercial deployments. As a result, residential deployments were up 130% and commercial deployments were up 116% compared to the previous quarter. For the full-year of 2014, SolarCity expects to deploy between 475 megawatts and 525 megawatts, which represents a growth of anywhere from 71% to 89% compared to 2013's 278 megawatts. This growth is a function of both increased operational capacity and an anticipated growth in demand.

Currently, SolarCity enjoys 80,000 contracts totaling $2 billion of cash, representing a growth of $900 million over $1.1 billion of cash contracts by the end of 2012. This is significant because in only one year, the company was able to nearly double its cash contracts. As a result, SolarCity posted an impressive growth in market share as the company's market share jumped from 12% in 2012 to 32% by the end of 2013. While the company's recent acquisitions helped with gaining market share, a lot of the growth was actually organic.

A year ago, SolarCity had less than 30 operation centers. As the company added 10 more to these centers in the last quarter, its current total is 46 and this will help the company achieve further economies of scale and reduce the costs further while accelerating sales growth.

As the company reduced its existing backlog considerably, it will be investing in sales and marketing in order to keep the demand high in the coming quarters for its residential business. SolarCity expects to be cash flow positive in 2014 even after all the heavy investing it will be doing on its sales and marketing in order to drive further growth in both residential and commercial businesses.

Historically, 40% of SolarCity's MW deployment occurs in the fourth quarter while the first quarter only claims 16% of the total MW deployments. This is due to strong seasonality in SolarCity's commercial business where there is a lot of pressure to finish projects by the end of fourth quarter but not as much activity in the first quarter. This is why the company gave a relatively weak guidance for the first quarter of 2014 compared to the fourth quarter of 2013; however, many investors took it the wrong way and sold their shares off in the after-hours. Keep in mind that SolarCity does not break its quarterly forward guidance by type of business (i.e., residential vs. commercial) so we have no way of knowing how the company's guidance actually reflects on each of its business segments. The two businesses have different types of seasonality such that residential business performs better during spring and summer while the commercial business performs better towards the end of the year.

SolarCity seems to have so much on its plate right now. The company is trying hard to grow as much as possible in the US while preparing itself for international growth through recently acquired Zep's international assets.

The company will be announcing further results early next week and we will find out about the profitability of SolarCity. At the moment, the company is still in aggressive growth mode, and as a start-up company, its profits will not matter as much as its growth rate. As long as SolarCity can keep meeting or passing its short- and medium-term goals in cutting costs and growing deployment (as well as capitalization), investors will continue to buy up shares of this company. I have some shares of SolarCity and I use them to write covered calls. This is a very volatile stock and covered calls usually get monthly yields as high as 3-6%; however, volatility is a risk to take seriously. This is why I wouldn't put a large portion of my portfolio here, but having a small position might not hurt. Until the company announces more detailed results next week, we will have to do with what it told us so far and things look good so far.

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.