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Solar City Just Getting Started



March 11, 2014 – Comments (2) | RELATED TICKERS: SCTY.DL

Board: Pencils Palace

Author: TMFPencils

Today SolarCity released results of a national survey that Inside Energy -- SolarCity's market research division -- which offers some interesting insights into the opportunities and continued transformation of energy delivery in the residential market in the U.S. I suppose the results should be taken with a grain of salt, given that SolarCity is one of the driving forces behind this survey, but I think this survey still captures some key items regarding homeowner sentiment of solar as an energy alternative. Before I get to the survey, I wanted to share a few of my thoughts on SolarCity's present situation.

The reality is that the prices of solar panels and solar installations -- two of the highest costs for SolarCity's popular solar energy leasing model -- will continue their downward trends in the coming years. As these "hard costs" continue to decrease, SolarCity will become all the more viable of a competitor to traditional utilities. Think about it: SolarCity today is able to compete with the rates of traditional utilities in 14 states. Thanks to SolarCity, solar energy is becoming a more convenient and affordable energy alternative when compared to traditional utilities in multiple states. As costs related to solar installations (such as panels and roof installations) decrease, SolarCity will become all the more competitive in new states and regions.

SolarPro Magazine's latest issue notes that these "hard costs" (panels, installations, etc.) are actually not necessarily the primary cost impediment to solar installers such as SolarCity. Rather, the magazine cites "soft costs" as one of prime areas where solar installers continue to struggle:

However, the industry is still grappling with stubborn non-hardware or soft costs, which include project financing; customer acquisition; labor; and permitting, inspection and interconnection (PII). The US Department of Energy estimates that soft costs account for more than 60% of a typical residential PV system cost. -

This is where SolarCity has a major advantage to competitors. SolarCity's project financing capabilities are extensive and growing through corporate lending partnerships (Google, etc.), banks (Merrill Lynch and others), and the company's new crowd funding arrangement for individual investors to finance solar installations. In the latest conference call update, CFO Bob Kelly had some key insights into the crowd funding model that SolarCity is pioneering:

The crowd funding is just bringing a solar asset in a very effective, on a technology platform, and a very cost effective way, to the common investor....

It’s no different than doing a securitization with institutional investors. You’re creating solar products for the individual investor and running it through our technology platform. I’m very optimistic. We’ve been working through the platform here in the first quarter, and working through more regulations than you could ever think of in getting it up and running, and looking forward the second quarter here. And that should work really, really well. I’m really optimistic there.

I can't tell you how many times I've heard these common criticisms of SolarCity: "Anyone can do residential solar installations. Any solar installer can finance projects through a crowd funding model." I have my doubts that this is a realistic possibility for SolarCity's competitors. Kelly's comments highlight the regulatory barriers SolarCity is working through just to bring this innovative crowd funding model to the market for investors. There are extensive costs involved with getting something like this off the ground, and few (if any) solar installers have the resources, network, and scope of SolarCity. This helps explain why SolarCity has 32% (and counting) of the residential housing solar installation market share.

This also goes for SolarCity's connections with corporate and bank lenders and partners. I think SolarCity's competitive moat is much larger than many give the company credit for, due in part to the leadership of the Rive brothers and the company's innovative culture, along with SolarCity's strategic partnerships with corporations (such as Google and Home Depot), banks and financing partners, and homebuilders.

SolarCity's customer acquisition cost also looks to be decreasing, thanks both to the acquisition of Zep Solar as well as improved internal efficiency with sales. The 4Q 2013 conference call in February contained some key thoughts from Lyndon Rive:

Looking for 2014, the foundation is ready for scale. We’ve already seen an increase in revenue, or at least our bookings, with January being our largest residential bookings in the company’s history. We’ve reduced our installation time, and reduced our installation cost, so the infrastructure is there, and we reduced our cost of capital and increased sources of capital. So we are ready to scale this business and look forward to an exciting 2014.


Now, for the first time in the company’s history, we don’t have a residential operational constraint. We’ve always had a long waiting list of customers, and now today a customer can get site ordered within five to eight days, and our systems will get installed within two to three months.

Now, this is a major achievement, and now we can invest into sales and marketing and grow the sales team and grow the bookings. It will take about three months to get the sales team up and running. It takes about two months to get the sales team fully productive. We started making these investments in Q4, and we really started seeing the results in January. January is our record residential bookings, so definitely starting to see the results.

I share this because SolarCity, being the disruptive business that it is, can be tricky to evaluate and follow as investors. However, digging a bit deeper helps expose why SolarCity continues to garner so much market share. There is a reason why SolarCity is leading this market and will, in my opinion, continue to dominate the solar installation market. SolarCity's leadership team, strategic partnerships, and ongoing innovation is a beautifully deadly mix that will likely become much more than a minor nuisance to traditional utilities in the coming years.

SolarCity looks expensive with a P/S ratio of 45, but keep in mind that the company's growing customer base does not merely represent a one-time revenue source. With each new customer, the company is locking in a reliable revenue stream for 20 years. As customer acquisition costs decrease and the company is able to bring on new customers at quicker rates going forward, SolarCity is setting the foundation to further transform energy delivery in the U.S. In the meantime, the stock is unlikely to line up in a way that looks cheap by traditional metrics (if it ever does, I will probably be adding as many shares as a college senior can afford).

Finally, keep in mind Lyndon Rive's closing comments in last week's 4Q 2013 conference call:

So, last week I mentioned that January was our record bookings for the company. We just ended February, and we beat January by a healthy margin. So momentum is fantastic, things have never looked better.

Be patient with SolarCity. The fact that many misunderstand the company and its potential is all the more reason to stick with this disruptor for the long haul. The stock will be volatile, but I have little doubt that if anyone can make solar energy a viable alternative on a national (and, someday, global) scale, it is the team at SolarCity. I am excited for where this company can go in the coming years.

With this in mind, here is SolarCity's press release from today highlighting the recent survey sponsored by the company. If anything, this survey highlights how SolarCity (and the solar market) is still very much in its infancy. SolarCity's current base of ~100,000 customers in 14 states are peanuts compared to traditional utilities. SolarCity may be a fly on the wall for traditional utilities today, but I anticipate that this will change over the next 5-10 years and beyond.

I added emphasis to the components that struck me as most noteworthy for us Fools.

San Mateo, Calif. – Mar. 10, 2014 – Clean Edge, Inc. and SolarCity (Nasdaq: SCTY) today announced the results of an inaugural national poll of U.S. homeowners regarding clean-energy products and services. The poll found that a majority of homeowners, 69 percent, want more choices when it comes to their energy and electricity supply. National polling firm Zogby Analytics was commissioned to conduct the poll. The new report, “U.S. Homeowners on Clean Energy: A National Survey,” is available for download at and

The poll confirmed that a significant majority of Americans (88 percent of homeowners) support renewable energy. It was also among the first to ask homeowners directly if they would be interested in solar for their own homes—62 percent said yes. This is particularly notable, given that there are more than 75 million owner-occupied housing units in the U.S., and fewer than 500,000 photovoltaic installations.

The SolarCity-Clean Edge poll also reveals the persistence of a myth that clean-energy products are not affordable. Less than half of all homeowners nationally understand that solar power is more affordable today than it was three years ago, despite the reality that prices for solar panels have dropped by more than half over this time period, and solar electricity prices can beat utility rates in a growing number of locations.

While homeowners generally view their current electric utility favorably, 73 percent of homeowners also said they would welcome clean energy provided by an entity other than their utility. Some utilities have attempted to impose fees and taxes on solar customers as a way of suppressing rooftop solar deployment, but energy providers should take note. Three out of four poll respondents voiced opposition to these types of efforts, saying that utilities should not be allowed to enforce restrictions on on-site energy systems. Though the sentiment was shared across all demographics, it was strongest among Republicans, Conservatives and middle-aged or elderly homeowners.

“Other surveys have looked at general green-consumer activity, but ours is among the first to focus on U.S. homeowners – a group that makes the majority of clean-energy residential purchases,” says Clean Edge managing director Ron Pernick. “The shift to clean-energy solutions was deep and wide across all demographics. Indeed, consumers not only want choice, but also want to protect their right to install their own distributed energy and storage systems.”

This is one exciting business with incredible potential. I also sleep well at night considering that Elon Musk has over $1 billion of his own money in SolarCity, and his continued support and confidence in the Rive brothers' leadership. The more I explore SolarCity, the more I understand why Musk is comfortable devoting most of his time at Tesla and SpaceX. SolarCity is in good hands.

David K

(Long SCTY) 

2 Comments – Post Your Own

#1) On March 11, 2014 at 12:58 PM, constructive (99.97) wrote:

"Think about it: SolarCity today is able to compete with the rates of traditional utilities in 14 states."

Only because they are willing to accept a return on assets/equity/investment far lower than traditional utilities. Even once they get to 10x the current scale, it's not clear that they will earn returns above their cost of capital.

They offer a good deal for consumers. That doesn't mean it's a good deal for investors.

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#2) On March 11, 2014 at 1:13 PM, constructive (99.97) wrote:

"if anyone can make solar energy a viable alternative on a national (and, someday, global) scale, it is the team at SolarCity"

Actually, I strongly believe that company is Berkshire Hathaway. They have the most profitable wind and solar portfolio in the world, over 6x the assets of SolarCity.

Despite transmission losses, concentrated wind and solar projects are far more efficient than small distributed systems. The physics and economics are not going to change.

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