Already the largest solar panel installer in the U.S., SolarCity (NASDAQ:SCTY) looks set to get better. Despite having a roller coaster ride in 2014, the stock is still up close to 15%, outperforming the S&P 500. Moreover, SolarCity's prospects received a solid endorsement recently when Canaccord initiated coverage on the stock with a buy rating, along with a $94 price target.
This move from Canaccord isn't surprising, as SolarCity is growing at a terrific pace. For example, in the first quarter, its revenue in the three months more than doubled year-over-year to $63.5 million, exceeding analysts' estimates of $53.4 million. The company also reduced its net loss to $24.1 million, or $0.26 per share from $40.9 million, or $0.54 per share in the year-ago period.
Solid growth expected
Going forward, SolarCity looks set to increase its lead. As reported on Investor's Business Daily:
"Canaccord's Josh Baribeau initiated coverage on SolarCity with a buy rating and a 94 price target. He anticipates that the solar-panel installer's cash flow will "increase dramatically from its high-margin contracts in the next two to three years."
Last month, SolarCity inked a deal to buy panel maker Silevo for as much as $350 million in stock. Silevo makes photovoltaic solar panels, which SolarCity Chairman Elon Musk touted as demonstrating a "unique combination of high energy output and low cost."
Hence, the company is making positive moves and this should allow it to tap the fast-growing solar market. To improve its performance, SolarCity has invested in its sales team, and this is yielding positive results. It booked 136 megawatts in the first quarter, well above its 100 megawatt forecast. It has expanded into Nevada, where it will be primarily focusing on Las Vegas. SolarCity has achieved 100,000 energy contracts till date, adding over 17,000 customer contracts last quarter, and is well on its way to 1 million customers.
The company has also increased its bookings guidance for 2014 to the range of 500 to 550 megawatts. It aims to continue investing in sales and marketing, and based on these investment efforts, its forecast for 2015 is expected to be in the 900 megawatt to 1 gigawatt range. SolarCity expects to have over 2 gigawatts of deployed solar panels by the end of 2015, clocking a historic growth rate of 98% for the last five years, if it succeeds in meeting this forecast.
The company is finding traction in several markets. For example, residential deployments doubled year-over-year from 30 megawatts in 2013 to 67 megawatts in the first quarter of 2014. It also had 50 megawatts of commercial deployments.
SolarCity has also completed more than $750 million of financing since the beginning of this year in a little over four months. It upsized an existing aggregation facility to $158 million earlier this year, and entered into a new $250 million facility led by Bank of America/Merrill Lynch.
An efficient business model will keep it ahead
Moreover, SolarCity is keen on lowering the all-in cost per watt, because a lower installed cost leads to a higher ROI for the energy major. The sales and marketing number is expected to grow on an absolute basis looking at the anticipated growth in deployments for the company.
SolarCity has setup the largest infrastructure for residential solar installation, making its market positioning robust. However, the company is expected to face tough competition from its rivals, First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) that are planning to enter the solar installation market.
However, SolarCity's sound business model and lead in the installation market should help it overcome the threat of newcomers. The company is focused on creating a recurring, predictable cash flow stream with each new energy contract. Its financial strategy is to maximize retained value for shareholders by covering investing activities with cash generated from operating and financing activities. It has built such expertise over time, and it will be difficult for new players entering this area to emulate.
Moreover, Philip Shen, a partner at Roth Capital, has also upgraded the firm to "buy" due to these factors. Particularly, SolarCity's considerable progress in nearly all aspects of its business such as cash flow, asset yields, and financing costs are impressive. It has been consistently increasing deployment expectations and is driving scale. Moreover, SolarCity has brought down installation costs by nearly 30% in two years, and sees more improvements ahead.
From a fundamental point of view, it is difficult to value SolarCity because it is still not profitable. As a result, the company doesn't have valuation metrics like a P/E ratio. However, a PEG ratio of just 0.51 indicates that SolarCity is set to grow its bottom line at a robust pace. The company is reporting astronomical growth, and also cut losses in the previous quarter. In addition, a current ratio of 2.21 indicates that it is well-equipped to handle its debt obligations. Considering the company's dominant position in solar panel installation and its aggressive growth targets, SolarCity should continue getting better in the long run.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.