SolarCity: Solid Growth Prospects Make It A Buy

| About: SolarCity Corp. (SCTY)


Growth in revenues has been extremely impressive, and the raised outlook shows how quickly the market is shifting towards solar power.

The contracts give the company a steady stream of cash flows, which should allow its cash flows to grow at a consistent rate over the next few years.

The company's ability to expand and its unique position in the domestic market should allow it to continue its growth.

SolarCity (NASDAQ:SCTY) announced its first-quarter earnings yesterday, and the company recorded impressive growth in its revenues. As a result, the stock price went up by more than 12%. In our last article, we talked about the industry and the growth prospects of the company. We maintain that the industry is still at its early stages in the domestic market, and the company's unique position should allow it to grow substantially over the next few years.

A Glance at the Earnings

SolarCity reported $63.5 million in revenues, up from about $30 million for the same quarter last year - operating leases and the energy systems segment recorded growth of about 100%, while the solar energy system sales went up by more than 100%. As a result, the gross profit of the company also almost doubled. However, the majority of the gross profit is contributed by the operating leases and solar energy system incentives segment, which has a gross margin of about 45% -- on the other hand, the solar system sales segment has a gross profit margin of just about 5%.

However, despite the massive growth in revenues, the company was not able to make a profit. The net loss for the quarter stood at $67 million, up from $26.7 million at the end of the first quarter last year. The company is spending heavily on marketing efforts in order to increase the footprint in the market, which has caused the losses to go up, despite astronomical rise in the revenues.

Analysis of Cash Flows

Source: First-quarter earnings press release

Cash flows from operations have mainly gone down due to the massive rise in the net loss, accounts payable, and reduction in lease pass-through obligations. The company has also increased its depreciation expense to about $19 million for the quarter, up from $7.2 million. Investments were mainly made in paying for the cost of the solar energy systems which the company leased or intends to lease in the future. Lastly, the company raised about $100 million in debt and repaid about $51 million, which has resulted in an increase of about $49.5 million in increased debt.

Growth in Business and Future Outlook

Moreover, the company installed 82 MW worth of solar panels for residential and business customers in the first quarter. Also, SolarCity added 17,664 customers in the first quarter, which is the largest quarterly gain in the company's history, and remains firmly on track to meet its one million customer target by mid-2018.

One of the most important factors for the jump in the stock price was future guidance - the company increased its guidance, and now predicts that it will be able to install between 500 MW-550 MW worth of solar panels this year and will increase to 900 MW to 1 GW (Gigawatt) worth of panels in 2015.

The company has added another state to its operations, and now operates in 15 states. SolarCity's ability to expand its market in this growing industry will play a vital role in establishing it as one of the most important players in the industry. At the moment, the domestic solar energy market is growing at an attractive rate and the shift towards solar energy is gathering pace.

One of the most important factors for the company is its operating lease contracts - SolarCity creates a customer that allows the company to have a regular stream of cash flow through contract payments. However, the company has to make payments for the equipment and the solar energy systems; as a result, the cash flows of the company are taking a hit in the short term. However, as it is a high-margin segment for the company, SolarCity should be able to benefit substantially from the increased customer base. Even with a lower growth in revenues and new contracts, the company will be able to maintain healthy cash flows from the previous contracts.


We believe the solar energy industry has a lot more potential and the industry will continue to grow at a rapid pace over the next few years. As a result, companies operating in the sector will be able to enjoy high growth rates - furthermore, these companies will try to capture the largest market share, which will result in increased expenditure on marketing efforts. Due to the high growth and the desire to achieve the largest market share; we might see some volatility in the short term. However, in the long term, SolarCity looks in a good position to grow, and the stock price should also continue to grow at a good pace.

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.

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