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An Initial Analysis of SolarCity (SCTY)

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December 20, 2013 – Comments (2) | RELATED TICKERS: SCTY

SolarCity (SCTY) struck my interest recently, and I am enjoying learning more about the company. It takes some time to fully grasp the company and its product offerings, but I am getting there. Hope this initial analysis is helpful to others, and additional thoughts and feedback are welcome and appreciated. 

Elon Musk is someone I would like to be invested in. Problem is, he comes with a pretty hefty price tag. Musk is one of the more innovative minds in the world today capable of putting ideas into action. Tesla Motors, of course, is richly valued at roughly $17.5 billion despite no profit and minimal/erratic cash flow production. Tesla's value comes largely from future prospects with electric vehicles. 

SolarCity, another indirect brainchild of Musk, looks a little more reasonably valued with similarly strong prospects. SolarCity is a solar energy provider, "revolutionizing the delivery of solar energy to homes and businesses across the U.S." This year SolarCity is ranked the second solar contractor in a growing $11.5 billion industry. SolarCity's customers include Walmart, Google, 

I am intrigued by solar technology, but I'm not looking to invest in a costly business dependent on government intervention for success. In 2012 Fast Company rated SolarCity the tenth most innovative business in the world, noting that "SolarCity expanded to the East Coast and added 12,000 projects, all without a dollar of government funding." SolarCity engages in the design, installation, financing, maintenance of every system. This approach helps new customers, whether residential or commercial, ease into a transition to solar energy. (Fast Company's write-up of SolarCity: http://www.fastcompany.com/3017374/most-innovative-companies...)

SolarCity was founded by Musk's cousins, Lyndon and Peter Rive. The Rive brothers, who are 35 and 38, respectively, founded SolarCity in 2006. Lyndon Rive serves as CEO, and Peter Rive as COO and Chief Technological Officer. Elon Musk serves as Chairman, owning approximately 22.5% of FirstSolar shares. See more about the management team here: http://www.solarcity.com/media-center/management-team.aspx

SolarCity is yet to net a profit, so the company is certainly a risky play at this point. However, the long-term picture shows a tremendous amount of potential that the company is capitalizing on by improving costs and gaining new customers. Nominal contract payments (estimated long-term payments remaining on SolarCity's installations) to SolarCity have increased from $500 million in 2011, $1 billion in 2012, to $1.7 billion so far in 2013. 

SolarCity's "Direct Financing" program enables customers to put down no capital upfront for a solar installation, opting instead for a pay-as-you-go plan. (SolarCity's plans also include repair, monitoring, and support services.) This approach will cost SolarCity, still a young company, in the short-term, but the name of the game with solar at this point is getting more customers to install solar energy systems. SolarCity is focused on the long-term strategy of gaining customers with relatively inexpensive solutions, while seeing the entire process through from design to monitoring of each customer's solar setup. 

Solar installations will not result in immediate cash on the books, especially with SolarCity's model; rather, solar payments occur over the life of the solar panels (up to 20 years). Put simply, these are returns that will reward SolarCity more in the long run rather than in the short-term. SolarCity's management calculates "retained value," a metric that estimates the discounted present value of future cash flows from its solar installation projects after subtracting all installation, repair, insurance, and investing costs. In other words, retained value is a present value estimation of the cash that will be retained by SolarCity. Management currently estimates retained value to be at $846 million. This number increases as SolarCity installs new systems and gains more residential and commercial customers. 

Another plus comes on the cash flow end, where SolarCity has seen major improvements over the past couple years. Operating cash flow was $18.08 million in 2011 (-$283.62M FCF), $60.33 million in 2012 (-$388.73M FCF), to $182.94 million so far in 2013 (-$330.58M FCF). The company's capital expenditures are, understandably, very high and explain the negative free cash flow at this point. However, the company's cash flow production is quickly increasing. 

SolarCity is rapidly expanding. In the most recent third quarter, SolarCity deployed 78 megawatts, a 109% year-over-year increase. The Residential segment saw an increase of 151% in megawatts deployed. Going forward it is critical that current investments help decrease costs, bring in new customers, and increase cash flow retained by the business.

CEO Lyndon Rive's goal is for SolarCity to have 1 million solar rooftop customers by 2018. As of August, SolarCity had 68,000 customers (I believe that number is now above 80,000, but am still trying to find the latest figure from the 3Q results). This is an ambitious company, backed by two young and dedicated founding brothers and Elon Musk, one of the most innovative technological (and business) minds in the world today. 

The stock certainly has its fair share of risks, and will likely be quite volatile going forward. I may open a small position after doing some further analysis into the business. If you're looking to get exposure to Musk, though, this currently looks to be a less pricey but equally-ambitious business compared to Tesla Motors. 

Here are some key statistics for SolarCity: 

Market Cap:                       4.74B
Employees:                        2,510
Qtrly Rev Growth (yoy):        0.52
Revenue (ttm):                    141.81M
Gross Margin (ttm):             0.42
EBITDA (ttm):                     -68.33M
Operating Margin (ttm):        -0.71
Net Income (ttm):                -64.66M
EPS (ttm):                          -1.02
P/E (ttm):                           N/A
PEG (5 yr expected):           -0.85
P/S (ttm):                           33.35
ROA (ttm):                         -4.07%
ROE (ttm):                         -34.3%
Cash (mrq):                        132.99M
Debt (mrq):                         316.42M
Op. Cash Flow (ttm):           247.67M

I am watching SolarCity closely. This would be one to hold for 10+ years, and would require extensive patience and a strong stomach for volatility. There are some wiz kids behind the business, however, and the innovative approach to solar installations just might be what is needed to push solar over the top in the U.S.

That's all for now...

Best,
David K

2 Comments – Post Your Own

#1) On December 20, 2013 at 3:57 PM, EnigmaDude (95.12) wrote:

Nice writeup.  I'm a SolarCity customer and one thing that I did not see you mention is that they also Lease their systems.  It is also a 20-year commitment with absolutely zero cost up front to the customer.  I pay a small monthly fee and generate enough electricity to get a credit from my local utility most months in the summer.  They own the system and are responsible for any repairs, etc.  They also get any tax credits or rebates but I'm fine with that since I come out ahead and help to reduce carbon emissions.

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#2) On December 20, 2013 at 9:25 PM, Mega (99.96) wrote:

"SolarCity expanded to the East Coast and added 12,000 projects, all without a dollar of government funding."

Fast Company's comment is absurdly false. SCTY and their customers use solar tax credits and rebates and in some cases Fannie Mae, Freddie Mac, USDA, DOE, HUD, VA, EPA and FHA loans.
http://www.solarcity.com/commercial/rebates-tax-credits.aspx
http://www.solarcity.com/commercial/portfolio/government/
http://www.sunlightelectric.com/subsidies.php
http://blog.rmi.org/blog_FHA_PowerSaver_Solar_Loans_The+_Best_Deal_Around
http://www.nrel.gov/docs/fy99osti/26242.pdf 

If it weren't for government programs, SCTY (and solar power in general) would be completely uneconomic.

The value here is very questionable. Most of the "retained value" depends on assumptions 20 years in the future.

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