I just sat down and read the entire SolarCity annual report, all 200-some pages of it.
SolarCity's business is banking (more accurately, consumer finance). They lend people money, and then either (a) borrow money to finance that lending, or (b) sell the loans to a third party while acting as servicer. (The fact that the money is lent to buy solar panels makes very little difference to the business model, although it does help fight global warming.) They're trying every structured finance product under the sun, and I read descriptions of at least a dozen in the annual report.
They were clearly losing money on *some* of them, since they deliberately unwound some of the older ones to refinance them, even though it required paying extra fees. They're presumably making money on others.
I can't extract the interest rate spread from the annual report; the accounting is far too convoluted. The interest rate spread is the key factor determining whether a finance business is profitable. It's clear that they make very little money off of direct sales, but I can't work out what their expected return on those is either. (All the evidence is that they are not competitively priced in the direct-sales business in most areas and as a result their main business is financing.)
Because of the overly convoluted accounting, I can't model what the effect of a change in default rate would be. With a financing operation, I want to be able to say "They lend out $1 billion at 5% interest; they finance it by borrowing $1 billion at 3% interest; they can afford a 2% default rate before losing money". With SCTY, I simply can't *tell* from their published documents.
They are even more like a bank in one way: a lot of their financing is much shorter-term than their lending. Solar Bonds for 1 year financing 20-year installs. This is the basic business model of banks, but banks are subject to *bank runs*. SolarCity could collapse due to a short-term refinancing problem even if the underlying business has great interest rate spreads and is highly profitable.
The only possible interest rate spread I've managed to find is 5-year "solar bonds" at 5.75% and MyPower loans at 4.5%. Uh-oh -- that's loss-making.
Admittedly I don't fully understand the financials - I don't think anyone really does
That's why I'm invested in Tesla, which has quite nearly the most straightforward financial statements of any company I've ever looked at, and I'm not invested in SolarCity, which has some of the most opaque financial statements I've ever seen.
Tesla's risk factors are clear -- can they sell enough cars? Will they manage to have high enough quality or will warranty costs eat up profits? Will they have supply chain restrictions (shortage of lithium or whatever)? Will they manage to get Model 3 out ahead of the competition? Will they solve their communications problems? Are the competitors ever going to make a car which is a serious competitor, and if so, when? Staying on top of the latest information regarding these is easy enough.
There are some financing questions, but Tesla's not very leveraged and nearly all their borrowings are convertibles, which are going to turn into equity. The latest secured loans are at super-low interest rates.
SolarCity's risk factors are also clear -- can they keep rolling over their short-term financing? Can they get financing with a large enough spread over the cost they're charging customers? Can they continue to charge customers so much, given that they're reported to be consistently more expensive than local installers if you're paying cash? Can they compete successfully with local banks in the market for lending money to finance solar panels? Almost all the questions are financing questions and the business is much, much more highly leveraged than Tesla -- which makes sense, since their business is finance. Unfortunately, I think staying on top of information regarding these is much, much harder to do.
I've evaluated banks before, and they're really quite tricky businesses; they have a habit of looking great until they implode. If SolarCity implodes due to financing, Silevo and Zep and the installation business would still be worth some money, but the massive borrow-and-lend operation would overwhelm it, the way GE Capital nearly overwhelmed GE a few years back.
Contrast this statement in the Tesla Motors annual report:
"During the periods presented, we did not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes."
With over 200 pages of the SolarCity annual report devoted to special purpose entities (albeit many consolidated).
I actually think the Rive brothers are trying to present SolarCity accounting in an honest way, but the result is a completely incomprehensible balance sheet. I'm not saying it's a bad company, I'm saying it's an indecipherable company. I personally would want to dig through a lot more interest rate details of their contracts before I concluded that they had a money-making (or money-losing) business model. If someone has actually got those interest rate details, I'd love to hear them, but I'd understand if you considered it confidential investment information!
