SolarCity Will Continue To Grow

Aug.20.14 | About: SolarCity Corp. (SCTY)

Summary

The stock has gained about 36% since we last wrote about the company and predicted strong growth opportunities for SolarCity.

The company has recorded some impressive revenue growth numbers over the last quarter.

New strategy to offer loans for ownership of systems might affect the sales in the short-term, but the medium-long term sales will be stable.

The solar energy market is still in the early stages and there is massive potential for the companies in this sector to grow.

SolarCity (NASDAQ:SCTY) is up around 36% since we last wrote about the company in May - the rise in the stock price has reaffirmed our bullish stance about the company. SolarCity is a provider of alternate energy services to homeowners, businesses and government organizations. Moreover, the company has a 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 is increasing its order backlog which will result in strong revenue growth in the coming quarters.

The second quarter proved to be a milestone for the company, as it recorded triple-digit year-over-year growth in all the key operating metrics during the period. The acceptance of solar energy is always challenged by the high per watt and installation costs; however, with the acquisition of solar module maker Silevo and change in the company's payment method strategy, SolarCity is expected to substantially reduce its installation costs - thus making it an economical and attractive alternative.

SolarCity: Growth Remains Strong

SolarCity has been one of the best performers in the sector. The company has recorded impressive growth over the course of last few quarters and has the core focus of its operations in the residential homeowner customers. Moreover, the company also reported impressive gains in the commercial market as well in the last year.

Source: Investor Presentation, Second Quarter Earnings, 2014.

The company has had solid growth over the last two years, which differentiates it from its industry peers. SolarCity installed around 280 Megawatts [MWs] of solar power systems during the last year and anticipates strong growth in its order backlog, leading to approximately 900-1000 MWs of clean energy by the end of 2015.

Source: Investor Presentation, Second Quarter Earnings, 2014.

SolarCity is creating more value for its shareholders with every passing quarter. The company reported present value of future cash flows of lease customers of around $1.8 billion by the end of second quarter. SolarCity management also announced $2.29 per watt of average installation costs in the second quarter, which has been substantially reduced [27% decline] from $3.16 per watt for the same quarter last year. This decrease in installation cost per watt is mainly due to the combined efforts of SolarCity with Silevo. Moreover, the company also plans to bring this cost to around $1.90 per watt till 2017, with a blended supply of high efficiency Silevo and third party modules.

SolarCity is on track to achieve its goal of deploying 500-550MW in 2014 and 900- 1,000MW in 2015 - the company has also strengthened its order backlog by booking 218 MW in orders, which is up 216% as compared to the same period last year. Further, the company has increased its future guidance by 83% year-over-year to deployment level of around 135- 150MW in the third quarter.

Source: Second Quarter Earnings Presentation, August 2014.

Change in Strategy could Harm Revenues in the Long Run

SolarCity is eyeing a major shift in its strategy regarding solar energy purchase methods for its customers. The company 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 purchase agreements [PPAs]. However, the company is considering a loan facility as the new solar energy purchase option for customers. This will challenge short-term revenue growth of the company as the new strategy may boost new connections, but might not result in increased revenues as the company will be offering loans to customers. However, this strategy will give the company a regular stream of income and the medium-long term revenues will grow at a more stable rate.

The conventional long-term PPAs or lease methods have recently caused several problems to the customers, threatening the sales due to customer dissatisfaction. Since homeowners do not own the SolarCity's solar systems under the lease program, they have faced severe problems while shifting their solar leases to the new tenant. Further, if the new tenant is not interested to buy the installed solar system, then solar lease owner have to face financial consequences to break the lease. On the other hand, the option to buy the solar systems with loan facility also has several advantages for customers. This method will allow the customers to own the systems and pay in installments. This strategy will enhance the revenues of the company in the long-term.

Conclusion

The management is making the right decisions for the long-term revenue growth of the company. SolarCity's focus on the domestic market is paying off and the company's ability to decrease costs as well as offer new ways to own systems will attract more customers. As a result, medium-long term revenue growth of the company will remain strong. We are still at the early stages of the solar energy market, and there is a lot of room for the companies in this sector to grow. We expect SolarCity to continue growth as more and more homeowners turn towards the solar energy.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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.