Over the last few years, SolarCity (NASDAQ:SCTY) has been experiencing a high rate of growth. Currently, the company has a 32% market share in the U.S. residential solar market, increased from 26.2% in the second quarter of 2013.
SolarCity has great growth opportunities ahead. According to GTM Research, U.S. solar PV installations rose by 41% to 4.751 GW last year. In 2014, U.S. solar PV is expected to grow by another 26% to 6 GW. Last year, solar was the second-largest source of new electricity-generating capacity in the U.S. Less than 0.5% of homes now have solar, leaving an enormous opportunity for companies like SolarCity. Analysts estimated that the residential and commercial solar market will rise 20% and 14% this year, respectively. SolarCity forecasts that it will deploy approximately 475-525 megawatts in 2014. If the company meets this target, that will represent a whopping 80% annual growth rate.
Analysts from Deutsche Bank estimated that SolarCity's market penetration rate is 0.2% in existing markets, which indicates significant room for growth. The analysts believe that the company's cumulative megawatts deployed can reach at least 3GW by 2016, which would still imply only 1% market penetration. The firm said that its estimates are likely conservative, as the company is targeting 1 million customers, implying 6 GW deployed by mid-2018.
SolarCity does not manufacture solar cells, instead, it purchases them from outside suppliers. By doing this, the company hedges against the price increase of silicon cells. This also reduces the competition for SolarCity. As it does not manufacture cells, it does not face strong competition from low-priced solar panels from China. Instead, the company purchases the inexpensive solar panels, and benefits from the lower prices. SolarCity purchases cells from multiple retailers, such as BenQ Corporation, Suniva Inc., Trina Solar Limited (NYSE:TSL) and Yingli Green Energy Holding Company Limited (NYSE:YGE).
Last November, SolarCity completed the market's first securitization of rooftop solar assets, selling about $54.23 million worth of notes that are backed by a group of solar energy systems it's installed in order to raise money. While SolarCity has traditionally financed its expansion from financial institutions or standard utility corporations, this represents the first instance in the solar industry of a company financing growth through asset securitization. The securitization plays a similar role to the company's growth prospects, as previous capital-raising efforts in the firm alone cannot fund the demand for installations, and it must therefore look elsewhere. However, the securitization is important in that it represents the first avenue of solar finance in the market, which will open the gates for further instances to come. SolarCity is expected to make another offering next year, which could be in the $100 million to $200 million range. In addition, the securitization also speaks volumes about the general solar market sentiment.
SolarCity is acquiring other related companies to improve sales and reduce costs. In August of 2013, it has acquired Paramount Solar, one of the leading solar sales and marketing firms, for about $120 million. Paramount Solar signs up customers, and then refers them to solar retail service providers such as SolarCity for the installation work. Acquisition of Paramount Solar improves SolarCity's remote selling capability, and then adopts its processes to reduce acquisition costs.
Similarly in December 2013, SolarCity acquired Zep Solar, one of its largest suppliers of rooftop equipment, for a total consideration of approximately $158 million. The acquisition of Zep Solar will have a significant effect on SolarCity's market penetration rate and operating costs. By acquiring Zep Solar, SolarCity's rooftop installation time will decrease from two or three days to less than one day.
In January 2010, SolarCity announced a $60 million tax equity financing partnership with Pacific Gas and Electricity [PG&E] to install more than 1,000 solar systems for U.S. homeowners and businesses. Over the past four years, this partnership has been playing an important role in SolarCity's growth, as it has been able to roll out solar systems quickly, which it would not have been able to finance alone. SolarCity has also received various other financing, such as $440 million from U.S. Bancorp (NYSE:USB). However, the partnership with PG&E is important for the future growth of SolarCity, because it provides insight into the perspective that major utility corporations are taking about the future of energy. Particularly with firms such as SolarCity, that are taking aggressive measures to expand quickly, we can expect to see further financing from utility firms trying to sustain profits in a rapidly-evolving industry.
The future of SolarCity looks extremely bright. It has a genius business model. As the U.S solar market is projected to grow, the company is poised to capitalize on this. Acquisition of Zep Solar and Paramount will increase the penetration rate and capture incremental market share. Based on its business model, the cash flow is really predictable over the long term. In my opinion, SolarCity is an attractive investment for long-term investors.
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.