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SolarCity (SCTY)

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Curt Renz

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Mar 5, 2013
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Last spring a thread was initiated in this forum that was devoted solely to discussion of the stock of SolarCity (SCTY). It made sense to have one here at the Tesla Motors Club, since there is no message board for SolarCity. Meanwhile, Tesla Motors CEO Elon Musk is the SolarCity board chairman and largest shareholder, while his cousins actually run the company.

Eventually that thread was hijacked for the discussion of other solar companies and alternative energy in general. SolarCity got lost in the noise. Now that SCTY has fallen 30% this month, I'm resurrecting a purely SCTY thread. Other alternative energy companies should only be mentioned in the context of how they might affect SolarCity. Current or potential SCTY shareholders are invited to participate.
 
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For all of those who invest in SCTY, I am still waiting for answer to some very important questions:

How do you value the company? How much is it worth today, how much will it be worth 5 or 10 years from now?

How do you know when it is overvalued or undervalued? When it was pulling back to $30 a few short months ago nobody seemed to be buying. Now that it pulled back to $60, everybody wants in. Not a lot has changed in SCTY since then.

There is a lot of people who invest in SCTY on this board and I can see why, but I would bet that there is less than a handful (most likely 0 or 1) people here that actually can model out their forward looking financials to show how much the company is worth or could be worth. I know that I am not one of those people.

What are SCTY's risks, and how confident are you that they will be able to navigate around all of those risks to avoid seeing the stock crash 90%?

Is $60 a good price to get in? Was $88 a bargain? How come $30 wasn't a great a bargain?

Why do people lease a system from a middle man who gets the vast majority of the benefit from the solar system when instead they can buy the system outright and bypass the middleman? Yes, I know there are reasons such as difficulty obtaining financing to buy a system, but I guarantee you that this is going to change very rapidly over the next few years.

These are all serious questions that I hope all of the SCTY investors here are at least thinking about.

I sincerely wish you all the best of luck, but I prefer to invest in companies that I can build financial models for.
 
For all of those who invest in SCTY, I am still waiting for answer to some very important questions:

How do you value the company? How much is it worth today, how much will it be worth 5 or 10 years from now?

How do you know when it is overvalued or undervalued? When it was pulling back to $30 a few short months ago nobody seemed to be buying. Now that it pulled back to $60, everybody wants in. Not a lot has changed in SCTY since then.

There is a lot of people who invest in SCTY on this board and I can see why, but I would bet that there is less than a handful (most likely 0 or 1) people here that actually can model out their forward looking financials to show how much the company is worth or could be worth. I know that I am not one of those people.

What are SCTY's risks, and how confident are you that they will be able to navigate around all of those risks to avoid seeing the stock crash 90%?

Is $60 a good price to get in? Was $88 a bargain? How come $30 wasn't a great a bargain?

Why do people lease a system from a middle man who gets the vast majority of the benefit from the solar system when instead they can buy the system outright and bypass the middleman? Yes, I know there are reasons such as difficulty obtaining financing to buy a system, but I guarantee you that this is going to change very rapidly over the next few years.

These are all serious questions that I hope all of the SCTY investors here are at least thinking about.

I sincerely wish you all the best of luck, but I prefer to invest in companies that I can build financial models for.

@sleepy

The answer is complicated.

The purchase of SCTY is a Musk play above all else.

The business has meat right now through the tax credits, but as an energy company renting roof space is a great deal.

The best way to model the business is to look at energy production costs. Project those moving forward.

Then look at panel and installation costs. Project how those are going to fall. The purchase of Zep solar makes their only patented product an installation rack, not a panel. SolarCity to Acquire Zep Solar


Then examine the "how-much-a-month" group they are selling to. They purchased solar marketing company Paramount to reduce customer acquisition costs.
SolarCity to Acquire Paramount Solar as First Step Toward Million Customer Goal


Then look at how their model works, again.

They buy lowest costs panels. They are the installer but they want to sell you POWER above all else.
As long as people don't have $$$ sitting around to buy panels, inverters, racking etc, SCTY will make money on the finance end.

That's why they are hard to value. There is no solar finance company doing what they are doing. They are insulated from bad deals by just making long term deals at every juncture.

I understand that the above are not numbers, but they represent the value of SCTY. Panel costs/watt, projected sale price/kWh generated, soft costs as percentage of total cost . . .

But the best way to evaluate future revenue is to look at Gigawatts under contract and installed.

SCTY is projecting 1/2GW installed in 2014. If they can continue to grow at their current rate, they'll install 3-4GW/year by 2020.

Should you value them like another power generation company with long term growth potential?
 
Why do people lease a system from a middle man who gets the vast majority of the benefit from the solar system when instead they can buy the system outright and bypass the middleman? Yes, I know there are reasons such as difficulty obtaining financing to buy a system, but I guarantee you that this is going to change very rapidly over the next few years.

Lease vs buy is all about peace of mind. I just bought a solar system for my house and the installer has a 5 year workmanship warranty (not sure whether this is typical). The inverter has a 10 year warranty, the panels 25 year. However solar manufacturers come and go all the time. All those warranties only cover equipment, not labor. A lease takes care of all this for you for the life of the panels/lease. Now you don't care if the panel manufacturer survives or have to deal with warranty issues, roof leaks, power production is guaranteed.

I just got into SCTY last week at around 67 (very unexpected order execution) - now already down a lot.
 
Can someone elaborate a bit more on the SCTY scheme. As I understand it they do everything for you by installing the panels on the roof, taking care of the connection to grid and doing all the accounting for it. What precisely are the deals that they offer to the customers (a sample would be excellent from someone who got an offer). Do they have packages for various levels of participation and what kind of exit terms there are (i.e. if you wanted the panels for your own cutting them out then when can you do it and what % of cost etc).

I'm trying to understand their profit model in a bit deeper scheme, but they don't provide much information on their web besides getting a quote which I cannot do as I don't live in the US
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Earlier this month I liquidated SCTY shares that I had acquired during IPO week for around $11. I exited my position precisely because I realized I had no idea how to value the company. My initial investment was based strictly on the "Musk factor" and the social proof of his involvement.

In terms of the sheer size of the space, I still believe the opportunity for SCTY is huge. However, I will need to make time to dive deeper into the financials and make a more informed decision before I get back in. I do believe that the future of power is in distributed solar + battery storage, and I do believe SCTY's unique relationship with TSLA puts it in a unique position to capitalize on the future energy economy.
 
Thanks for reviving the thread. I agree SCTY is a special case.

I like SCTY a lot. For one thing I'm a happy customer, and I like investing in companies that make their customers happy. For another, I believe that it has a great revenue model, which at the moment is focused on growth and more growth, but could be turned into cash flow if they wanted. What is more, if their order book starts to dry up, the existing leases automatically turn to cash generation, so there is a kind of future-proofing there.

The one thing that concerns me a bit recently is that Solar City has apparently stopped rolling out fixed storage batteries. I was away when this happened and I don't really understand why, especially at a time when Tesla is getting a lot of positive buzz from their potential to supply same. What do people think about this?
 
They stopped because utilities took 8 months to process the application forms and they had only gotten through a handful of them in total. So for now they stopped the process due to regulatory idiocy, it was covered at some point in the alternative energy thread I think.

But ggr as a customer, can you tell me what the exact deal is that you get from SCTY? What was your initial investment and what did they promise and what are your rights now with regards to future?
 
They stopped because utilities took 8 months to process the application forms and they had only gotten through a handful of them in total. So for now they stopped the process due to regulatory idiocy, it was covered at some point in the alternative energy thread I think.

But ggr as a customer, can you tell me what the exact deal is that you get from SCTY? What was your initial investment and what did they promise and what are your rights now with regards to future?

Mario, I am not a customer but AFAIK solar lease offers you 0 down + guaranteed rate for the power produced by your panels for the life of the lease. So you pay the same rate that you pay today (which is <= rate from the power company) for the foreseeable future.
AFAIK the amount of power produced is guaranteed (the leasing company pays for the shortfall).
 
Mario, I am not a customer but AFAIK solar lease offers you 0 down + guaranteed rate for the power produced by your panels for the life of the lease. So you pay the same rate that you pay today (which is <= rate from the power company) for the foreseeable future.
AFAIK the amount of power produced is guaranteed (the leasing company pays for the shortfall).

But how does that work in overproduction/underproduction schemes. For example if you install enough panels that your summer daily production far exceeds your local usage and the power is sold to the grid and you need to buy it back in the evening. How is that managed with SCTY. If there are subsidies for renewables production, then those I guess are taken by SCTY? What periods for the lease are used? Who owns the equipment during/after the lease. Early exit penalties?
 
Can someone elaborate a bit more on the SCTY scheme. As I understand it they do everything for you by installing the panels on the roof, taking care of the connection to grid and doing all the accounting for it. What precisely are the deals that they offer to the customers (a sample would be excellent from someone who got an offer). Do they have packages for various levels of participation and what kind of exit terms there are (i.e. if you wanted the panels for your own cutting them out then when can you do it and what % of cost etc).

I'm trying to understand their profit model in a bit deeper scheme, but they don't provide much information on their web besides getting a quote which I cannot do as I don't live in the US
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Sorry for my long post, but following was my interaction with Solarcity..

I have had SolarCity System on my roof since Oct 2012. I signed up for it in March 2012 and installation was completed in Oct 2012.
At that time, I got quotes from Real Goods Solar and one Other Local contractor and Solarcity.
At that time, Real Goods Solar and Local Contractor gave quotes to own the system. And My 4.320 kW system would have cost me about $15,000 to $17,000 out of my pocket.
I would have kept the SREC and i would have been eligible for the 30% Government Tax credit.

Solarcity gave me 3 choices, Owning was almost same cost as others (Don't remember exact numbers).
Second choice was $0 down and pay fixed 6 cents/kwh for the energy used (Again don't remember exact number, but probably lower then $.06/kWh.. They increased the price after I signed up, because of some Chinese manufactured anti dumping duty.. More on it later)
Third choice was Prepay the lease @4.2 Cents/kWh.. They estimated that the 4.320kW system will produce approx. 5400kwh/year and @$0.042 cents/kwh * 5400 kwh/year * 20 years ~ $4500 and I would not have to pay anything to Solarcity later, even if my panels produced more. They also guaranteed that if it doesn't produce minimum 5400 kwh/year, they will send me the check for the under production.

There was promotion going on for 500$s refund for signing up and then 400$s / referral for first 4 referrals and $1000/referral after that during same month. I signed up for the 3rd options, as It was the least headache (No need to wait for Tax credit and selling SRECs and no maintenance compared to option 1, Most warranty etc. ) And no need to pay monthly to SolarCity.

Later on, I referred my friends/neighbors and total 13 families signed up from our development of 101 houses. Since, I had given all the referrals, I would have received all the referral cash. But I didn't want to take all the referral money for me, so When every one was deciding whether they were going to sign up or not, I offered to split referral money equally between all the signers. Unfortunately only 6 of these 13 signed within the promotion period and other signed in trickle over next 6 months, so we didn't get Full benefit off 400*4 + 9*1000 = $10600 but we got somewhere around $4500 back from Solar city and we split them between us.

And since, those other neighbors signed up after March/April 2012.. They got worse price and After that (I think when around SCTY IPOed) The price had increased to between 8-10 Cents/Kwh and after that It was not as a great deal since we are already getting 12 cents/KwH from JCPL.. So more people in my community didn't sign up after that.

Anyway, after Initial sign up discount off $500 and Referral bonus for me off around 800, I paid total $3200 from my own pocket as a full Pre Payment PPA. And My yearly Electricity bill was around $900 before this.
During whole 2013, I came out ahead every month, in the sense that Panels generated more then what we consumed, so I paid $2.20 /month (Interconnection fee by JCPL) whole last year.

At this rate, My Prepayment will be completely paid off in 2016 and after that I think, I am personally free and clear.
 
I am a customer of solar city ( in Plano TX), My system ( 40 solar panels - 10KW system) was installed in the end of December 2013 but Oncor took their cool time approving it to be connected to the grid - almost 6 weeks. Solar city had a few different options. For the best rate ~3 cents per kwh, you can prepay the 20 yrs lease. If you put 0 down the rate was close to ~8 cents per kwh. This set up does not have any batteries just connected to the grid with net metering.
 
Thanks for reviving the thread. I agree SCTY is a special case.

I like SCTY a lot. I believe that it has a great revenue model, which at the moment is focused on growth and more growth, but could be turned into cash flow if they wanted. What is more, if their order book starts to dry up, the existing leases automatically turn to cash generation, so there is a kind of future-proofing there.

Agree with the above. SCTY is quietly building large power distribution infrastructure which grows with every new customer. Their business model is very innovative. If I ever decide to go solar I would choose Solar City (if they come here) over buying and installing panels in a traditional way. I do not consider them to be in the same group with solar panels manufacturers, although they compete in the same space.

I had a position in SCTY, made good profit, sold and bought more TSLA. My reason for selling was to load more into TSLA as rightly or wrongly I see TSLA as having bigger potential.

The one thing that concerns me a bit recently is that Solar City has apparently stopped rolling out fixed storage batteries. I was away when this happened and I don't really understand why, especially at a time when Tesla is getting a lot of positive buzz from their potential to supply same. What do people think about this?

I have no clue but the first crazy thought is that perhaps they have a better product in the pipeline.
 
Thanks all for the explanation and the links.

But ggr as a customer, can you tell me what the exact deal is that you get from SCTY? What was your initial investment and what did they promise and what are your rights now with regards to future?

I don't think I'm a typical customer for them. Basically, when we bought the Roadster nearly 6 years ago, we asked about how much it would cost to install a charger, and who we would get to do it. They told me that there was a company, Solar City, who would install the NEMA 14-50 outlet for free if we also wanted Solar. As it happens, I'd been thinking about solar for some time. I helped a friend do his own installation, and knew I didn't want to DIY. So I called Solar City and got a quote, and the economics appeared to work out, so we just bought the system outright. I had no idea of the connection between Solar City and Tesla at the time, I thought they were just referring each other. It's a 3kW system, install and forget... they remotely monitor it, and once called me to tell me that the inverter broke and they were going to replace it. It cost about $16k at the time (remember, 6 years ago!) and should be breaking even soon ;-). It allowed us to adopt time-of-use charging, which seems to work out for us. We're thinking of getting the rest of the roof, which currently has a pool heater that needs to be fixed or replaced, added to the system. Since we own the system, it just adds to the value of the house; the remote monitoring is part of the service for, I think, 20 years.
 
Just out of curiosity, Sleepyhead, why are you so against SCTY? Seems like you really don't like it. Elon owns 25% of SCTY common stock and is Chairman of the Board... do you think he is influencing the company in a bad way? I remember reading you have a competitor's system on your own roof. Has this influenced your opinion of Solarcity? Also, if you've done your research on Solarcity, do you have any good points you find in Solarcity? I think you have all the answers to the questions you posed above and would also like to hear those in this specific thread as well. Thx for your reply.
 
This is my pricing model. Would love to hear all your feedback.

Of all the numbers SCTY publishes I think the key number is Retained Value of the outstanding contracts. As of 2013 Q4, they say they have a Retained Value of about $1 Billion. They come up with this by discounting 6% on the remaining contracts after excluding shares of cashflows that go to tax equity partners. Hence I view this almost as cash in bank. They hold this value against a backdrop of 83K cumulative customers.

They set themselves a goal of 1Mil customers in about 4 years from now by July 4 2018. They seem quite confident that they will accomplish this goal. I see no reason to doubt them.

In fact given their growth rates and un-official guidance for 2015/16, I believe they will hit this target by July 4 2017 itself!

Reference: In this video Lyndon Rive: Disrupting Solar (Again) VERGE SF2013 - YouTube Lyndon Rive said they will do 1GW in 2015; 2GW in 2016 etc - contrast that with official guidance of 0.5GW for 2014.

If we were to take a simple linear extrapolation they would have $12Bil of Retained Value. But it gets even better; their existing cumulative Retained Value is based on $1.5/watt. But as they are lowering their costs and increasing their share into the pool of money, they already achieved $2/watt of Retained Value for new contracts done in 2013 Q4. Even if we flatten this out into all of the future, we get a Retained Value of $16Bil.

There are at least 2 or maybe 3 boosters to this extrapolated Retained Value.
1) SCTY’s Retained Value/Watt further increases with time as SCTY’s financing and installation costs come down and its share of money into the pool goes up.
2) Contracts with Battery Storage further increase retained value.
3) Maybe SCTY can make money off of grid stabilization.

Now lets look at Book Value from Balance Sheet. From the latest 10K it is currently at $0.8Bil. I think it's a fair assumption to expect Book Value to grow inline with Retained Value. If anything Book Value might grow faster due to scale and efficiency. If we were to use the same 16X multiple, we get a book value of $12.8Bil.

The average P/B of S&P 500 over last 25 years is 2.85. Using the same multiple, we get a market cap of $36.5Bil. Using this multiple is v v conservative.

That's basically a 6 bagger in 3 to 4 years. Not too bad!

- - - Updated - - -

In terms of the opportunity for long term growth, literally sky is the limit.

If you look at the ROTH presentation slide 7, they show that reaching 1Mil customer target would be 2.4% market penetration. Note:
- This is including only "current" buildings. How many more building will be built over time?
- This is "only" for the 14 states they currently service in. What if more states or even countries open up as potential markets? They are already talking about expanding into Japan/Australia next year.

Finally, in one of the YouTube videos, Lyndon Rive said he wants to grow SolarCity into the largest "energy company" in the world. Not sure if it means beating Duke or Exxon. All I can say is there is plenty of ambition, skill, and business acumen that we can ride on by buying this stock.
 
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