SolarCity (NASDAQ:SCTY) is a provider of alternate energy services to homeowners, businesses and government organizations. The stock has been performing splendidly over the last twelve months with a gain of around 126%. There has been a decline of over 38% in the stock price since the end of February; however, the stock is still up over 100% for the last twelve months. The companies operating in the solar market have seen substantial gains due to the increased demand and saving on the costs. SolarCity has a very strong position in the domestic solar energy market, and the expected growth in this segment is likely to result in further growth for the company.
SolarCity Growth Story
The growth in the solar systems market is getting stronger after a recent slump in the demand. SolarCity is one of the leading renewable energy companies, which currently installs approximately one out of every four solar energy systems installed in the United States. The core focus of the company's operations is the residential homeowner customers. SolarCity offers its customers the option to either purchase and own solar energy systems or to purchase the energy produced by solar energy systems through various contractual arrangements which includes long-term leases and power purchases agreements [PPAs].
The last year was quite profitable for solar companies due to the strong demand. Solar is the second largest source of new electricity generating capacity in the U.S., exceeded only by natural gas, according to the Solar Energy Industries Association. Similarly, SolarCity has shown significant growth in its revenue over the past few years, derived from its core business operations: operating lease revenue. The operating lease revenue grew by 79% year-over-year in the last year; however, the increase in the solar system sales revenue was marginal and showed that the majority of the new installations were done on lease basis. The overall growth in the total revenues was 29% in the last year.
During the last year, the company deployed 280 MW of solar panels mainly due to the increasing demand in the residential market. This year, the company expects to install 475 MW - 525 MW of solar panels representing a growth of 11% in production, which ensures further improvement in the company's revenues this year.
Technology plays a crucial role in determining the survival of solar companies in the long run. Building efficient ways of generating low-cost energy provided to the customers at the minimum possible enables the solar companies to increase their profit margins. Due to this, solar companies apply for product patents in order to gain competitive advantage over others. As of last year, SolarCity had 9 patents issued and 48 pending applications with the U.S. Patent and Trademark office. Moreover, the company's existing patents will start expiring in 2025, which gives the company plenty of time to increase its customer base and guarantees its revenue by technological edge in the industry. Another growth area could be charging stations for Electric Vehicles [EVs]. Since the EV industry is growing at a tremendous rate, the company could also benefit heavily from this business segment.
Competition in the Industry
The solar industry is becoming one of the most lucrative businesses with considerable growth rates in the residential as well as utility scale market. According to the National Multifamily Housing Council, 73% American homeowners polled are open to receiving clean energy from a provider other than their current utility provider. Moreover, there are more than 75 million (65% of the total U.S. housing units) owner-occupied housing units in the U.S. and fewer than 500,000 photovoltaic installations, which means the solar energy market has a lot of room to grow in the domestic segment and it has barely scratched the surface. SolarCity has a strong position in the domestic market and the company is forgoing the growth offered by the utility scale solar market.
However, the consistent switching of residential customers towards clean energy gives a unique opportunity to the company. SolarCity also entered into the largest rooftop solar aggregation facility led by Bank of America (NYSE:BAC), expected to finance more than 200 MW of solar projects for homeowners and businesses. Going forward, the company has continued its investment in technology to attain competitive edge over other industry peers. SolarCity recently acquired Zep Solar for $158 million to add diversity to the company's product line. These investments in the key areas should put the company in a stronger position against its competitors.
Despite a massive rise in the stock price over the last year; I believe SolarCity is a good pick. The recent fall in the stock price has made the stock attractive. Over the last year, we have also seen strong growth in the fundamentals of the company, which support the rise in the stock price, in my opinion. Going forward, there is a lot of room for the company to grow and the expected growth in the solar market should allow the company to continue its growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.