Very few funds own meaningful stakes in Solar City. Most of the trading volume consists of traders/momentum players, and funds accumulating positions. As more funds begin to accumulate, Solar City should go up. However, due to the high number of momentum traders, and panic sellers, the volatility will likely be very high, and I wouldn't be surprised if it falls more before taking off again.
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Alternative Energy Investor Discussions
- Thread starter ShortSlaver
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A couple of you have noticed through my website that I do not currently own SCTY and sent me inquiries through TMC private messages. Below is my latest response:
Bought 3/11 & 3/25 @ 18.18 avg
Sold 5/30 @ 48.32
Bought 6/24 @ 33.43
Sold 7/16 @ 41.31
I sold the first time in anticipation of the IPO lock-up expiration. I sold the second time to get off margin for which there is an interest charge that share price increases must justify.
Bought 3/11 & 3/25 @ 18.18 avg
Sold 5/30 @ 48.32
Bought 6/24 @ 33.43
Sold 7/16 @ 41.31
I sold the first time in anticipation of the IPO lock-up expiration. I sold the second time to get off margin for which there is an interest charge that share price increases must justify.
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I too sold and bought back because of IPO lock-up. I just heard back from my tax guy, he says I need to pay my Estimated Taxes ASAP or I may be penalized at tax time.
Here's some of my latest SCTY thoughts:
1. Solar sentiment - overall solar industry sentiment seems to be in limbo.
2. I listened to the Q2 ER conference call and read through their 10q (I highly suggest this any anyone invested in SCTY or solar). It seems like SCTY is doing okay. They're on track with their growth. Expenses seemed a bit high and I think they're going to need to tackle this (they recently hired a new VP to cut costs). Overall, though Q2 ER IMO was good but not great/fantastic and didn't surpass high expectations.
3. News out today that SCTY is acquiring Paramount Solar, which is already one of Solarcity's most successful channel partners:
SolarCity to Acquire Paramount Solar as First Step Toward Million Customer Goal - Yahoo! Finance
I look at this as a positive move. This should help cut costs and drive more customer acquisition.
“SolarCity has developed what I believe to be the best field sales and marketing organization in the solar industry. The national residential solar market has been growing between 60-70 percent annually, and we’ve been growing at twice that rate—144% year over year in the most recent quarter—and had three times the market share of our nearest competitor in 2012,” said SolarCity CEO Lyndon Rive. “Now we’ve found the perfect complement. Hayes Barnard and Guthy│Renker have built what I strongly believe to be the best virtual sales organization in the solar industry, with an extraordinary ability to acquire customers at a low cost. We expect the addition of Hayes, Ben and the Paramount Solar team to help us attain our goal to reach one million customers in the next five years at an even lower cost than was previously possible.”
Currently SCTY has 68,000 customers. I don't see how they're going to reach 1mm in 5 years. It just shows what kind of growth trajectory management is expecting. If they reach 1mm customers in 5 years, that will truly be incredible.
1. Solar sentiment - overall solar industry sentiment seems to be in limbo.
2. I listened to the Q2 ER conference call and read through their 10q (I highly suggest this any anyone invested in SCTY or solar). It seems like SCTY is doing okay. They're on track with their growth. Expenses seemed a bit high and I think they're going to need to tackle this (they recently hired a new VP to cut costs). Overall, though Q2 ER IMO was good but not great/fantastic and didn't surpass high expectations.
3. News out today that SCTY is acquiring Paramount Solar, which is already one of Solarcity's most successful channel partners:
SolarCity to Acquire Paramount Solar as First Step Toward Million Customer Goal - Yahoo! Finance
I look at this as a positive move. This should help cut costs and drive more customer acquisition.
“SolarCity has developed what I believe to be the best field sales and marketing organization in the solar industry. The national residential solar market has been growing between 60-70 percent annually, and we’ve been growing at twice that rate—144% year over year in the most recent quarter—and had three times the market share of our nearest competitor in 2012,” said SolarCity CEO Lyndon Rive. “Now we’ve found the perfect complement. Hayes Barnard and Guthy│Renker have built what I strongly believe to be the best virtual sales organization in the solar industry, with an extraordinary ability to acquire customers at a low cost. We expect the addition of Hayes, Ben and the Paramount Solar team to help us attain our goal to reach one million customers in the next five years at an even lower cost than was previously possible.”
Currently SCTY has 68,000 customers. I don't see how they're going to reach 1mm in 5 years. It just shows what kind of growth trajectory management is expecting. If they reach 1mm customers in 5 years, that will truly be incredible.
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DaveT - How do you value SCTY? Do you have a similar valuation model to TSLA? Also, how much revenue per customer per year does SCTY receive on average? How does the revenue number compare to cash flows per customer per year? Basically I am curious what kind of cash flows does SCTY get from 1mm customers and are there any operating costs associated with retaining those customers? How high will the stock price go in 5 years if they do reach 1mm customers?
What is your opinion on the risks associated with SCTY, specifically net metering? It looks like there is a push in Arizona to modify or remove net metering, this will be a big bust for companies like SCTY, RSOL, and SPWR's distributed generation business. Can they mitigate net metering with battery storage? It doesn't seem very cost effective today, but hopefully in the future.
I would appreciate your input.
What is your opinion on the risks associated with SCTY, specifically net metering? It looks like there is a push in Arizona to modify or remove net metering, this will be a big bust for companies like SCTY, RSOL, and SPWR's distributed generation business. Can they mitigate net metering with battery storage? It doesn't seem very cost effective today, but hopefully in the future.
I would appreciate your input.
Whats going on with CSIQ today? Also I was wondering on your opinion which one solar stock too buy. Ive got $1000 im looking to put into one company in the solar industry but simply cannot choose which company too buy. Advise would be much appreciated (sleepyhead , DaveT etc)
(since its such a small amount I dont mind higher risk)
(since its such a small amount I dont mind higher risk)
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I would personally recommend SOL. Sleepy may or may not be with me on this. I have been on the SOL train (pun intended) for a while. The company stock price is low so with your small investment it could see the largest return. SOL has itself placed very well in the marketplace and can grow at a quick pace.
also they still haven't reported Q2 yet where I think the rest of the solar industry major players have. I have high hopes for SOL and they might still not have a great Q2, though I am reading the facts they should, but solar has taken a beating this earnings season no matter what the news it it seems
CREE just reported a decent quarter but flat outlook and got killed AH. I am going to try and jump on that soon. Just making that statement if anyone else here has and interest in the LED industry
No he did not, but he did say I will have to fill out Form 2210 http://www.irs.gov/pub/irs-pdf/f2210.pdf
After looking over the form, I will have him fill it out for me.
SOL is a good one. I bought 160 J14 $5 contracts for $0.20 a piece back when SOL was at $2.50; I already sold some of them for around $1. If you are looking for high risk/high reward then this might be a good one, because they have their own Poly plant and China just implemented a tariff on US and S. Korean poly that will hurt the other Chinese players. SOL also has large exposure to EU and will benefit from minimum ASP's. They also have little debt compared to other Chinese players.
On the down side they just preannounced their earnings with margins at 5%-6% which will not be enough for a profit. Hopefully they give good guidance going forward. I still think that almost all of the solar players had "good" earnings reports and the market just crushed them anyway: SPWR, CSIQ, etc.
If you want very high risk/extremely high reward potential then go with Chinese players such as SOL, CSIQ, or TSL. Maybe even JKS, but I don't know anything about that one other than its stock has been the best performer over the last month (so probably not a good time to buy).
Overall, my investment thesis has not changed on the solar industry. Solars are getting crushed right now and it is a good time to be buying. A lot of people had very high expectations going into this quarter and did not get excellent results they were hoping for so the stocks got crushed. CSIQ missed analyst (literally one or two analysts covering this stock) EPS number by $3m on $400m+ of revenue and the stock is down like 30% - ridiculous.
If you trust the analyst EPS of $2.50 for 2014 on $2.5b in revenue then you are getting a hell of a bargain on CSIQ at $11. If these numbers are true then CSIQ will be a 5 bagger by next year. I have not done enough research to know if this is even reasonable.
One thing is for sure though: Capacity (supply) is slowly going down, while worldwide demand is surging and will very shortly cause a shortage of panels worldwide.
Understanding Solarcity
I'll try sharing what I know though I have to admit it's limited. The specifics of SCTY's business model are somewhat confusing to me, though I get the gist of it. Prior to IPO I was really trying to wrap my head around how they're valuing leases, payments, etc and how to value the company but couldn't really figure it out. I became confident in the leadership and overall growth trajectory but confused about the specifics on how to model their valuation over time. I remember analysts were having a difficult time coming up with SCTY valuation as well around the IPO. Anyway, I eventually pulled the trigger (cost basis $14.50) mainly because the stock was rising and I didn't want an opportunity to invest in an Elon company get away (and Elon during pre-IPO had said that $13-15 for SCTY was a fair value for investors).
So, I guess I'll share some background and then go more into specifics.
First, I get a lot of my understanding of SCTY and solar from watching a ton of Elon Musk interviews and talks. He's bullish on solar as he thinks it will the one of the most popular ways to generate power in the future. When he suggested to his cousins to start a new solar company, the concept was to avoid manufacturing solar panels. He felt back then that China was/would subsidize the solar companies there and it would be too difficult to compete against them with panels. Further, Elon viewed the solar panels as more of a commodity item. They weren't that difficult to make. He saw the big challenge in solar was to integrate everything together in a cost-efficient manner - panels, inverter, racks, permits, installation, electrical work, monitoring, etc. So, when he funded SolarCity (and his cousins became CEO and COO), they sought to become the "Dell of solar". They wanted to pull all the parts together and integrate them in a very convenient, cost-effective manner for their customers.
Initially, this worked well. But over time, they encountered another problem and that was of financing. Not a ton of people could pay cash upfront for a new solar system. So, they started offering financing for solar systems, and things really started to take off.
So, in the beginning they were more like a construction company IMO. They would install the system, make their money, and move on to the next house. Later, when they started to offer financing, they wanted a way to benefit from the financing they offered in a long-term manner. So, they came up with a way to offer a 20-year lease to the customer (construction/components money provided by a 3rd party), the lease payments would go to SolarCity and then SolarCity would pay the 3rd party investor so they would get a decent return on their 20-year investment, and then after 20 years SolarCity would own the solar system on the roofs. So, after year 20, SolarCity would still be able to get payments from customers (if the customers wanted to continue) but they wouldn't have to pay a 3rd party investor anymore. So, it would be a ton of cash flow from years 20 on since the system is paid off. (I'm not sure if they've changed this more recently or not, but I think it's still the case they own the system outright after 20 years w/o obligation to any 3rd party.) So, the super long-term vision of SolarCity is to own the solar systems outright on a ton of houses and have this unending cash cow of a business. But in order to get there, they need to set up financing and make rather thin margins because they need to give the vast majority of lease payments to the original 3rd party investors in order keep existing investors and attract new ones.
This is why SolarCity now brands themselves as "selling energy." They're moving drastically away from solar system sales, and want to profit not just on the 20-year lease but even more so after the lease is over when they outright own the system. On another note, when they outright own the system the customer can benefit too because SolarCity can drastically reduce the costs of energy to the customer because they no longer have 3rd party payments to make from the financing. So, the customer gets much cheaper energy (than even during the 20 year lease) and SolarCity gets a ton of profit with little expense.
You can imagine the potential of this model when you think about 10 million homes with SolarCity solar systems on their roofs, and how after 20 years SolarCity would own the systems outright and the huge cash flow that can generate. For example, if SolarCity charges each house conservatively $100/month or $1200/year for electricity and expenses are $200/year for maintenance/monitoring. Revenue would be 1200 x 10mm = $12 billion a year with $2 billion in expenses. $10 billion profit. Multiply that by a 15 P/E multiple, then you've got a $150 billion market cap company.
But of course, this would take a very long time to achieve. Because not only would you need 10 million homes with SolarCity solar systems installed, you would need to wait 20 years until their leases are over before SolarCity can take advantage of outright ownership and huge profit margins. So, if it takes 15 years to get 10 million homes installed, another 20 years for lease payments (let's calculate 15 years because some would start during the 10mm home ramp-up), then you've got 30 years before they really start their amazing profit period. But that might be aggressive, so maybe let's say somewhere between 30-40 years. Amazingly, the Solarcity leadership really does seem to be thinking that far into the future. It's quite remarkable.
Now, I have my doubts if they're really going to be able to own the solar systems outright in 20 years. The reason being is because if raising financing becomes difficult, then they might need to hand over some of the post-20 year ownership/profit to the 3rd party financing parties who finance the 20 year lease. This will lower the crazy margins Solarcity gets then post-20-year-lease. And it could be possible that this is already what they're doing. I'm unclear on it.
Alright, so let's move on. How will SolarCity actually deliver on the 10mm houses in 15-20 years? Well, the whole business model of SolarCity is focused around convenience and cost-efficiency. They want to make it super convenient and cost-effective for the customer to switch to solar. That's why they've completely integrated the entire solar experience from sales, financing, installation, monitoring, and even post-installation energy efficiency home improvements. SolarCity uses their own people to design systems, install them, and fix them. It's all intended to create the most convenient customer experience, but also because over time it's the best way to drive down costs. In this way, SolarCity is very similar to SpaceX and Tesla Motors. All three companies integrate multiple aspects of their business and bring it altogether for a better customer experience but also to drive down costs.
Over time, SolarCity's competitive advantage will be cost-efficiency derived from integration. They will try to drive down costs in every angle of their business. Every penny will count. And they will be able to do this better than any of their competitors because they're the most focused on it. Other competitors don't have this 30-40 year vision and they aren't driven to complete integration like SolarCity. Over time, as SolarCity grows their cost advantage can grow too because they can take advantage of their current systems, personnel and also economies of scale. This is why SolarCity doesn't view other solar companies as their competitors. They view current electric utilities as their main competitors, and know that they need to provide a significantly cheaper source of electricity than them.
You mentioned net metering, and I do think this poses a significant challenge to SolarCity and all solar companies in the U.S. Currently net metering is helping to keep costs affordable for solar customers, but if net metering is revoked solar costs can increase (and they might need to install backup batteries, etc.). Solarcity is keenly aware of this challenge. Also, the federal tax credits for solar will be available until the end of 2016, after which solar systems could cost more to the end user w/o the tax credits. As a result, Solarcity's solution is to focus on cutting costs like crazy. They believe that they can cut costs (also helped by lower component costs as well) of the overall solar systems by enough to offset the effects of net metering removal and expiring tax credits. Whether they can do it remains a question. But nevertheless, they are religiously focused on it. If any large company in the residential solar installation sector can overcome the challenge of expiring tax credits and net metering, I think it's SolarCity.
I do think that there's opportunity in residential solar for straight solar system sales and installation. However, I don't see it likely for a large company to thrive in this space because it's a one-time revenue job. After a certain point, I think you might reach a saturation point where it's difficult to find cash buyers of new solar systems. So, I'm looking at the cash solar system sales and install business as a niche market. The main market will be leased/financed solar systems.
Regarding revenues and cash flows, I'm less clear on this aspect of their business than the concepts I've shared so far. Basically, it appears that everything starts with financing since demand for their systems isn't a problem. So, Solarcity raises investment funds (largely banks, companies, etc) and promises (or asserts) a certain return on investment. Depending on the type of fund (joint venture, lease pass-through, sale-leaseback... for more info see page 20-21 of Q2 10q) Solarcity ends up receiving payment from their solar customers and giving a portion of that payment to the fund investor. However, it appears more complicated than that because Solarcity can lease the system to the fund investor, and then the fund investor sub-leases it to the customer (lease pass-through). Or they Solarcity sells the system to the fund investor, then leases it back from then and sub-leases to the end customer (sale-leaseback). Or the fund investor acquires the solar system together with Solarcity (joint venture) and it's then leased to the customer.
In Solarcity's Q2 results summary:
My understanding is that the estimated nominal contracted payment remaining is basically the amount of remaining payments SolarCity is to receive over the course of the 20-year leases. Basically, it's revenue. Then, SolarCity needs to pay the fund investors.
Retained value is what they're attributing to as the value of their portion of the 20 year lease payment but also of the value of the solar system after the 20-year lease is over. This is probably a better metric in trying to value the company. However, I'm unclear exactly how they're calculating the value of the solar systems in 20 years (it might be in the 10k/10q somewhere). Also, because some or much of the retained value is so far out (ie., 20+ years), then we need to discount that in whatever valuation modeling we do.
In their Q2 results, they say they have 54k energy contracts (64k total customers, I'm assuming that's because of cash sale systems). If the retained value is $662mm and we divide that by 54k energy contracts, then we've got $12,259 per contract in retained value. But I think this is skewed because commercial contracts are decreasing, while residential contracts are rapidly rising and residential contracts would be significantly lower. I would imagine the retained value on a residential contract would be between $5000-10000.
So, if SolarCity had 1 million customers (not sales, but energy contracts) and each of those contracts had a retained value of $5000, then the total retained value would be $5 billion. However, much of that sum would be very long-term (ie., post lease), so we would need to discount that value somehow in our modeling. But nevertheless, if Solarcity reaches their "1 million customers in 5 years) goal, then it's not far-reaching to see how they can have $5 billion in retained value in their leased/financed solar systems. If we up the average retained value to $7500/system then it would be $7.5 billion in retained value if they reach their 5 year goal. If we were trying to figure out a valuation, we would also need to factor in growth and future revenue that they will generate from new system sales. So, in 5 years how would I value the company if they did have 1 million contracts and they were growing strong? Hard to say. Maybe 10-20 billion. But that's a rough guess. I'd probably discount the $5-7.5 billion in retained value to $3 billion or so because it's so far out but one the other hand it's fairly reliable of an asset because it's not going anywhere. Then, I'd factor in current and future revenue into the valuation. If their on a trajectory to reach 10 million customers within 10 years after that point, then I'd say you'd need to tack on at least $10-20 billion to the valuation, so $13-23 billion. This is pretty much a random guess though and could be much more, or it could be less (Note: would love feedback here). The valuation multiple probably largely depends on how strong the growth trajectory is at the point of reaching 1mm customers.
It's interesting because SCTY doesn't seem to have made a big deal of this "1 million customer goal in 5 years" goal in the past. In fact, this is the first time I've seen mention of it. It's quite astounding because 1) it's a large # of customers (currently they're at 64k), and 2) it's a very short timeframe, just 5 years. Honestly, I don't know how they're going to accomplish this. It's quite mind-blowing.
Let's take a minute to track to model what this "1 million customers in 5 years" goal looks like. At the end of 2012, they had 40k energy contracts. By end of June 2013, they had 54k contracts. So, let's say they add another 36k contracts in the second half of 2013.
2013 - 50k new customers (total 90k)
2014 - 80k new customers (total 130k)
2015 - 120k new customers (total 250k)
2016 - 190k new customers (total 540k)
2017 - 270k new customers (total 810k)
2018 first half - 190k new customers (total 1mm)
Basically, Solarcity needs to grow like a weed in order to have any chance of reaching this "1 million customers in 5 years" goal. It almost seems crazy to even think about it, yet alone attempt it. this just goes to show the confidence in SolarCity's management (or their insanity):
1) They believe the residential solar industry is going to boom
2) They believe they can offer the most-compelling product (cost and convenience) to attract this kind of demand
3) They believe they can scale their company to meet this demand
Without these three beliefs, I don't see how SCTY management would even entertain such a lofty, crazy goal. Further, just entertaining a crazy "1 million customers in 5 years" goal means that the management really believes strongly in these three beliefs I've mentioned.
It's kind of strange to me that Solarcity doesn't promote this goal more to their investors. Their quarterly reports and conference calls seem very focused on what's going on this year, and they don't really point to a clear 5 year goal like this. It almost seems like they want to downplay things a bit. But then again, if they were trying to downplay things then why would they mention this goal in their press release today.
On another note, it's amazing how long-term in view Elon Musk's companies are - SpaceX (colonization of Mars), Tesla Motors (electrification of entire auto market), and SolarCity (moving energy to solar). All of these companies goals are 20-40 years out. It's truly astonishing.
Alright, I'll end with a few disclaimers.
Please everyone, do your own research. Read the annual reports, quarterly reports, etc. and make up your own mind. Who knows, I could be making up everything if you don't see the facts yourself. Do your research and get as close to the companies you're considering to invest in as possible before making a decision (if it's a long-term investment). And remember I'm just an opinion.
Also, though I was bullish on SCTY when I bought and I'm bullish on SCTY long-term, I just want to be clear I'm not suggesting a specific price to buy at or time to buy. Getting in at the right price is extremely difficult to do. Sometimes you wait for it to dip, but it goes up. Other times you buy, and then it goes down. Buying and timing strategies is a whole other discussion. Further, the solar industry can be fickle too and sentiment can change in either direction. So, rather than a recommendation to buy SCTY I'd rather people take this as a conversation starter. I'd like to learn more about SCTY and also I'd like to see if there are major holes in my thinking. I'd love for others to chip in time and research and come up with a better way to model SCTY's valuation as well.
A few final random thoughts. It appears that SolarCity seems to be moving toward PPA (power purchase agreements) with their residential customers. I'm unclear if this is just a repackaged lease or if this somehow differs from a 20 year traditional lease. Would love if someone who knows can clarify.
Lastly, their insider ownership seems strong (see proxy statement). And Elon Musk owns 27% of the company.
I'll try sharing what I know though I have to admit it's limited. The specifics of SCTY's business model are somewhat confusing to me, though I get the gist of it. Prior to IPO I was really trying to wrap my head around how they're valuing leases, payments, etc and how to value the company but couldn't really figure it out. I became confident in the leadership and overall growth trajectory but confused about the specifics on how to model their valuation over time. I remember analysts were having a difficult time coming up with SCTY valuation as well around the IPO. Anyway, I eventually pulled the trigger (cost basis $14.50) mainly because the stock was rising and I didn't want an opportunity to invest in an Elon company get away (and Elon during pre-IPO had said that $13-15 for SCTY was a fair value for investors).
So, I guess I'll share some background and then go more into specifics.
First, I get a lot of my understanding of SCTY and solar from watching a ton of Elon Musk interviews and talks. He's bullish on solar as he thinks it will the one of the most popular ways to generate power in the future. When he suggested to his cousins to start a new solar company, the concept was to avoid manufacturing solar panels. He felt back then that China was/would subsidize the solar companies there and it would be too difficult to compete against them with panels. Further, Elon viewed the solar panels as more of a commodity item. They weren't that difficult to make. He saw the big challenge in solar was to integrate everything together in a cost-efficient manner - panels, inverter, racks, permits, installation, electrical work, monitoring, etc. So, when he funded SolarCity (and his cousins became CEO and COO), they sought to become the "Dell of solar". They wanted to pull all the parts together and integrate them in a very convenient, cost-effective manner for their customers.
Initially, this worked well. But over time, they encountered another problem and that was of financing. Not a ton of people could pay cash upfront for a new solar system. So, they started offering financing for solar systems, and things really started to take off.
So, in the beginning they were more like a construction company IMO. They would install the system, make their money, and move on to the next house. Later, when they started to offer financing, they wanted a way to benefit from the financing they offered in a long-term manner. So, they came up with a way to offer a 20-year lease to the customer (construction/components money provided by a 3rd party), the lease payments would go to SolarCity and then SolarCity would pay the 3rd party investor so they would get a decent return on their 20-year investment, and then after 20 years SolarCity would own the solar system on the roofs. So, after year 20, SolarCity would still be able to get payments from customers (if the customers wanted to continue) but they wouldn't have to pay a 3rd party investor anymore. So, it would be a ton of cash flow from years 20 on since the system is paid off. (I'm not sure if they've changed this more recently or not, but I think it's still the case they own the system outright after 20 years w/o obligation to any 3rd party.) So, the super long-term vision of SolarCity is to own the solar systems outright on a ton of houses and have this unending cash cow of a business. But in order to get there, they need to set up financing and make rather thin margins because they need to give the vast majority of lease payments to the original 3rd party investors in order keep existing investors and attract new ones.
This is why SolarCity now brands themselves as "selling energy." They're moving drastically away from solar system sales, and want to profit not just on the 20-year lease but even more so after the lease is over when they outright own the system. On another note, when they outright own the system the customer can benefit too because SolarCity can drastically reduce the costs of energy to the customer because they no longer have 3rd party payments to make from the financing. So, the customer gets much cheaper energy (than even during the 20 year lease) and SolarCity gets a ton of profit with little expense.
You can imagine the potential of this model when you think about 10 million homes with SolarCity solar systems on their roofs, and how after 20 years SolarCity would own the systems outright and the huge cash flow that can generate. For example, if SolarCity charges each house conservatively $100/month or $1200/year for electricity and expenses are $200/year for maintenance/monitoring. Revenue would be 1200 x 10mm = $12 billion a year with $2 billion in expenses. $10 billion profit. Multiply that by a 15 P/E multiple, then you've got a $150 billion market cap company.
But of course, this would take a very long time to achieve. Because not only would you need 10 million homes with SolarCity solar systems installed, you would need to wait 20 years until their leases are over before SolarCity can take advantage of outright ownership and huge profit margins. So, if it takes 15 years to get 10 million homes installed, another 20 years for lease payments (let's calculate 15 years because some would start during the 10mm home ramp-up), then you've got 30 years before they really start their amazing profit period. But that might be aggressive, so maybe let's say somewhere between 30-40 years. Amazingly, the Solarcity leadership really does seem to be thinking that far into the future. It's quite remarkable.
Now, I have my doubts if they're really going to be able to own the solar systems outright in 20 years. The reason being is because if raising financing becomes difficult, then they might need to hand over some of the post-20 year ownership/profit to the 3rd party financing parties who finance the 20 year lease. This will lower the crazy margins Solarcity gets then post-20-year-lease. And it could be possible that this is already what they're doing. I'm unclear on it.
Alright, so let's move on. How will SolarCity actually deliver on the 10mm houses in 15-20 years? Well, the whole business model of SolarCity is focused around convenience and cost-efficiency. They want to make it super convenient and cost-effective for the customer to switch to solar. That's why they've completely integrated the entire solar experience from sales, financing, installation, monitoring, and even post-installation energy efficiency home improvements. SolarCity uses their own people to design systems, install them, and fix them. It's all intended to create the most convenient customer experience, but also because over time it's the best way to drive down costs. In this way, SolarCity is very similar to SpaceX and Tesla Motors. All three companies integrate multiple aspects of their business and bring it altogether for a better customer experience but also to drive down costs.
Over time, SolarCity's competitive advantage will be cost-efficiency derived from integration. They will try to drive down costs in every angle of their business. Every penny will count. And they will be able to do this better than any of their competitors because they're the most focused on it. Other competitors don't have this 30-40 year vision and they aren't driven to complete integration like SolarCity. Over time, as SolarCity grows their cost advantage can grow too because they can take advantage of their current systems, personnel and also economies of scale. This is why SolarCity doesn't view other solar companies as their competitors. They view current electric utilities as their main competitors, and know that they need to provide a significantly cheaper source of electricity than them.
You mentioned net metering, and I do think this poses a significant challenge to SolarCity and all solar companies in the U.S. Currently net metering is helping to keep costs affordable for solar customers, but if net metering is revoked solar costs can increase (and they might need to install backup batteries, etc.). Solarcity is keenly aware of this challenge. Also, the federal tax credits for solar will be available until the end of 2016, after which solar systems could cost more to the end user w/o the tax credits. As a result, Solarcity's solution is to focus on cutting costs like crazy. They believe that they can cut costs (also helped by lower component costs as well) of the overall solar systems by enough to offset the effects of net metering removal and expiring tax credits. Whether they can do it remains a question. But nevertheless, they are religiously focused on it. If any large company in the residential solar installation sector can overcome the challenge of expiring tax credits and net metering, I think it's SolarCity.
I do think that there's opportunity in residential solar for straight solar system sales and installation. However, I don't see it likely for a large company to thrive in this space because it's a one-time revenue job. After a certain point, I think you might reach a saturation point where it's difficult to find cash buyers of new solar systems. So, I'm looking at the cash solar system sales and install business as a niche market. The main market will be leased/financed solar systems.
Regarding revenues and cash flows, I'm less clear on this aspect of their business than the concepts I've shared so far. Basically, it appears that everything starts with financing since demand for their systems isn't a problem. So, Solarcity raises investment funds (largely banks, companies, etc) and promises (or asserts) a certain return on investment. Depending on the type of fund (joint venture, lease pass-through, sale-leaseback... for more info see page 20-21 of Q2 10q) Solarcity ends up receiving payment from their solar customers and giving a portion of that payment to the fund investor. However, it appears more complicated than that because Solarcity can lease the system to the fund investor, and then the fund investor sub-leases it to the customer (lease pass-through). Or they Solarcity sells the system to the fund investor, then leases it back from then and sub-leases to the end customer (sale-leaseback). Or the fund investor acquires the solar system together with Solarcity (joint venture) and it's then leased to the customer.
In Solarcity's Q2 results summary:
- Estimated Nominal Contracted Payments Remaining of $1,409 million at June 30, 2013, up 15% from $1,222 million at March 31, 2013.
- Retained Value forecast of $662 million at June 30, 2013, equating to retained value per watt forecast of $1.27/W at June 30, 2013.
My understanding is that the estimated nominal contracted payment remaining is basically the amount of remaining payments SolarCity is to receive over the course of the 20-year leases. Basically, it's revenue. Then, SolarCity needs to pay the fund investors.
Retained value is what they're attributing to as the value of their portion of the 20 year lease payment but also of the value of the solar system after the 20-year lease is over. This is probably a better metric in trying to value the company. However, I'm unclear exactly how they're calculating the value of the solar systems in 20 years (it might be in the 10k/10q somewhere). Also, because some or much of the retained value is so far out (ie., 20+ years), then we need to discount that in whatever valuation modeling we do.
In their Q2 results, they say they have 54k energy contracts (64k total customers, I'm assuming that's because of cash sale systems). If the retained value is $662mm and we divide that by 54k energy contracts, then we've got $12,259 per contract in retained value. But I think this is skewed because commercial contracts are decreasing, while residential contracts are rapidly rising and residential contracts would be significantly lower. I would imagine the retained value on a residential contract would be between $5000-10000.
So, if SolarCity had 1 million customers (not sales, but energy contracts) and each of those contracts had a retained value of $5000, then the total retained value would be $5 billion. However, much of that sum would be very long-term (ie., post lease), so we would need to discount that value somehow in our modeling. But nevertheless, if Solarcity reaches their "1 million customers in 5 years) goal, then it's not far-reaching to see how they can have $5 billion in retained value in their leased/financed solar systems. If we up the average retained value to $7500/system then it would be $7.5 billion in retained value if they reach their 5 year goal. If we were trying to figure out a valuation, we would also need to factor in growth and future revenue that they will generate from new system sales. So, in 5 years how would I value the company if they did have 1 million contracts and they were growing strong? Hard to say. Maybe 10-20 billion. But that's a rough guess. I'd probably discount the $5-7.5 billion in retained value to $3 billion or so because it's so far out but one the other hand it's fairly reliable of an asset because it's not going anywhere. Then, I'd factor in current and future revenue into the valuation. If their on a trajectory to reach 10 million customers within 10 years after that point, then I'd say you'd need to tack on at least $10-20 billion to the valuation, so $13-23 billion. This is pretty much a random guess though and could be much more, or it could be less (Note: would love feedback here). The valuation multiple probably largely depends on how strong the growth trajectory is at the point of reaching 1mm customers.
It's interesting because SCTY doesn't seem to have made a big deal of this "1 million customer goal in 5 years" goal in the past. In fact, this is the first time I've seen mention of it. It's quite astounding because 1) it's a large # of customers (currently they're at 64k), and 2) it's a very short timeframe, just 5 years. Honestly, I don't know how they're going to accomplish this. It's quite mind-blowing.
Let's take a minute to track to model what this "1 million customers in 5 years" goal looks like. At the end of 2012, they had 40k energy contracts. By end of June 2013, they had 54k contracts. So, let's say they add another 36k contracts in the second half of 2013.
2013 - 50k new customers (total 90k)
2014 - 80k new customers (total 130k)
2015 - 120k new customers (total 250k)
2016 - 190k new customers (total 540k)
2017 - 270k new customers (total 810k)
2018 first half - 190k new customers (total 1mm)
Basically, Solarcity needs to grow like a weed in order to have any chance of reaching this "1 million customers in 5 years" goal. It almost seems crazy to even think about it, yet alone attempt it. this just goes to show the confidence in SolarCity's management (or their insanity):
1) They believe the residential solar industry is going to boom
2) They believe they can offer the most-compelling product (cost and convenience) to attract this kind of demand
3) They believe they can scale their company to meet this demand
Without these three beliefs, I don't see how SCTY management would even entertain such a lofty, crazy goal. Further, just entertaining a crazy "1 million customers in 5 years" goal means that the management really believes strongly in these three beliefs I've mentioned.
It's kind of strange to me that Solarcity doesn't promote this goal more to their investors. Their quarterly reports and conference calls seem very focused on what's going on this year, and they don't really point to a clear 5 year goal like this. It almost seems like they want to downplay things a bit. But then again, if they were trying to downplay things then why would they mention this goal in their press release today.
On another note, it's amazing how long-term in view Elon Musk's companies are - SpaceX (colonization of Mars), Tesla Motors (electrification of entire auto market), and SolarCity (moving energy to solar). All of these companies goals are 20-40 years out. It's truly astonishing.
Alright, I'll end with a few disclaimers.
Please everyone, do your own research. Read the annual reports, quarterly reports, etc. and make up your own mind. Who knows, I could be making up everything if you don't see the facts yourself. Do your research and get as close to the companies you're considering to invest in as possible before making a decision (if it's a long-term investment). And remember I'm just an opinion.
Also, though I was bullish on SCTY when I bought and I'm bullish on SCTY long-term, I just want to be clear I'm not suggesting a specific price to buy at or time to buy. Getting in at the right price is extremely difficult to do. Sometimes you wait for it to dip, but it goes up. Other times you buy, and then it goes down. Buying and timing strategies is a whole other discussion. Further, the solar industry can be fickle too and sentiment can change in either direction. So, rather than a recommendation to buy SCTY I'd rather people take this as a conversation starter. I'd like to learn more about SCTY and also I'd like to see if there are major holes in my thinking. I'd love for others to chip in time and research and come up with a better way to model SCTY's valuation as well.
A few final random thoughts. It appears that SolarCity seems to be moving toward PPA (power purchase agreements) with their residential customers. I'm unclear if this is just a repackaged lease or if this somehow differs from a 20 year traditional lease. Would love if someone who knows can clarify.
Lastly, their insider ownership seems strong (see proxy statement). And Elon Musk owns 27% of the company.
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sub
Active Member
Dave, as usual great info. I have two points/questions. One, where does the 20 years to pay off each system number come from? I recently installed an 8kw system on my house and it will have paid for itself 3-4x within 20 years. That would change their long term numbers significantly, even if it's a 10 year average pay off.
Also, one issue I've heard happening with leased systems (I paid cash for mine) is that In some cases home owners are having a hard time selling their house because the new buyer has to qualify and take over the solar lease. I don't know if this could have any affect on the growth of the business.
I'm not invested in any Solar stocks, still enjoy the education however. Thanks.
Also, one issue I've heard happening with leased systems (I paid cash for mine) is that In some cases home owners are having a hard time selling their house because the new buyer has to qualify and take over the solar lease. I don't know if this could have any affect on the growth of the business.
I'm not invested in any Solar stocks, still enjoy the education however. Thanks.
Hi sub, the 20 year period is the length of the customer lease. So, let's say the customer is paying $100/month over 20 years on a lease for the solar system. The customer pays Solarcity monthly but basically that money is split between the lease financing party (fund investor) and Solarcity, but most of the money will go to the fund investor because the fund investor put down the money to pay for the system and install.
Regarding home ownership transfer, in Q1 ER CC Lyndon Rive mentioned how they try to make it easy and simple to transfer the solar system lease when selling your home. I've called SolarCity and asked them about this, and they said it's fairly simple. Just some papers to transfer the lease, but the new owner has to have decent credit. I think though Solarcity has lowered the level of credit required in recent months, so it's easier to transfer the lease.
kevin99
Member
sub
Active Member
Thanks, I figured it was something like this causing the 20 year payoff. I wouldn't think the lease transfer would be a frequent issue considering the new home buyer qualified or paid cash for the house, wasn't sure if that had been mentioned however.
Certainly very optimistic to think that they can grow like this, but just based of the exponential growth in the past, this is indeed the trajectory that they are on! Very simplistic exponential forecast below, based on MW data available in their reports, and a guessed crude allocation of yearly MWs in 2010 and 2011, and assumed 4kW average system and a simple continued ratio of residential and commercial customers as in Q2 2013. Not very good, but you get the basic picture. One should not imply that this is possible just because they managed to grow like this in the past, its a huge challenge, but I can understand why they have it as a target. In 5 years this model do point at on the order of 1 m customers...
Great post DaveT. I had a few comments to make, but since it took me two days to finish reading your post
I will probably forget everything I wanted to say.1. Retained value per residential customer can be easily calculated by using the average system size (I am sure they provide this somewhere - Sunpower does and theirs is about 8.5 kW) and multiply it by $1.27/W value that SCTY provided. SPWR has better panels so their retained value is $1.75/W. Therefore SPWR's retained value is close to $15,000 per residential customer.
2. I don't really understand the concept of retained value. In Sunpower's case it kind of makes sense to me because their panels have 25 year product warranties (will probably last even longer because of the high quality) and they tested annual degradation to be only 0.13% (they guarantee less than 0.25% degradation per year to be conservative). I am sure that some panels will still fail before 25 years.
In Solar City's case they use Trina and Yingli panels that only have 10 year product warranties and 0.5% or less guaranteed degradation. After 20 years, the degradation might be significant and a significant amount of panels could potentially fail. I think that SCTY and SPWR take these factors into consideration and that is why SPWR uses a retained value that is 40% higher than SCTY.
That said, I still don't understand the concept of retained value. Nobody is going to want to keep the old panels on their roofs since there will be newer technolody by then and people will want new panels (or whatever is popular 20 years from now) and will sign a new lease if necessary; kind of like upgrading your phone. I can see some people willing to keep their old systems, since they can go month to month or maybe get a discount.
This whole retained value concept has too many moving variables and unknowns to precisely determine a value such as $1.27/W (which btw increased from $1.25/W from last quarter). SPWR also says that a 1% reduction in financing costs will increase their retained value by $0.40. This is great, but what if interest rates go up? I think that rates will be going up in the future if anything. New solar REIT's, MLP's, etc. are not going to make this business model significantly better in the future compared to today's environment if interest rates go up.
3. I have heard of one company that gave customers in Arizona, that previously signed contracts but do not have panels installed yet, the option to back out of the deal because of the new push to remove or heavily modify net metering policies. I think Colorado is also looking to modify net metering rules.
4. PPA vs. Lease - this is just my guess, which could be completely wrong:
With a lease you promise to pay Solarcity $X per month for 20 years and Solarcity promises a minimum of Y Wh's produced and each year that Y value declines. If the panels produce above Y then the customer benefits from this and gets to keep the extra generation. If the panels produce under Y Wh's then solarcity has to make up the difference. This is a risk to SCTY, especially since these panels are not tested and could degrade a lot more than promised after 10 years or so, or the failure rate may be high.
With a PPA Solar City would offer the customer a set rate of $Z/Wh and then the customer would pay SCTY a monthly bill based on how many Wh's were produced during the month times. This is a better model than lease, because with lease the customer keeps the upside while SCTY is exposed to the downside. With PPA SCTY is still exposed to the downside, but gets to keep the upside.
5. I still don't know how to value SCTY and if their growth path is even sustainable. This sounds like a very capital intensive business with very little payoff in initial years. If financing dries up, state laws change, there is a panel shortage (I know it sounds crazy today), or other business models pop up then Solar City can get hurt. I am not saying any of this will happen, but to me it sounds like SCTY's business model will not fare well in a recession.
6. I don't think that SCTY will get to 10 million homes, because there is only like 70 million homes (off the top of my head, so I might be wrong on this) total in the US. I highly doubt that they reach that amount any time soon if ever. This would require a lot of favorable law changes to get this kind of demand. I live in Texas and there is no incentive to put panels up even though we are at the risk of facing several roliing blackouts per year, starting in a couple of years due to inevitable capacity shortage from growing demand. Hopefully the politicians get their heads out of their asses but I doubt they ever will.
7. There is (IMO very reasonble) backlash from the utility industry that people with solar panels are being unfairly subsidized for transmission line use by those that don't have panels. I feel like this will allow utility companies to keep the status quo a little bit longer than necessary. Until at least battery technology is cheap enough to live completely off the grid at least.
8. 1 million homes requires something like $30b in financing and that is a lot of money. Especially since the market made a huge deal out of the $500m they received from Goldman Sachs.
Overall, I think that there is a good chance that Solar City reaches a $10bn market cap, but the risks are a lot higher than with TSLA.
Norse
Active Member
Solar sector took a beating second half of the day
Yeah. Red days for us atm. Lets hope Renesola can do what the others couldnt.
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