SolarCity (SCTY)

[futureproof]

I believe this is where the fundamental disconnect is. SPWR gets wholesale prices for it's electricity. SCTY gets retail prices.

In my own electric bill the difference is a factor of 3X

(supply charges vs delivery charges vs total charges is 1:2:3)

HenryF, I think SPWR is a wisely diversified company, with a specific mix of utility, commercial, and residential that works for them. In the Q4 conference call, they noted that they didn't give residential lease more weight because of the net metering risks and regulatory uncertainty. Cash sales were much safer and rev. rec. more immediate. However, the CEO did note that they will go deeper into residential lease/ppa now. It has become more of a focus and they will adjust their mix appropriately.

To me, I find this telling that they want a piece of what Solarcity is getting. I also see that they are topped out on capacity right now, so they will have to adjust resources from one area in order to compensate. Although their capacity should jump up nicely in 2015, I still feel they are keenly aware of "getting in now" on this market segment. I do say that the KB Home deal they have is big. I've seen a few KB Home communities pop up here in LA in the past few years and have even visited one and talked with a sales rep about the solar system and "Zero House." KB Home sells affordable homes focused on first time home buyers. They generate over a $1bln annual revenue, so no slouch in this market. As far as I know, the SPWR agreement is for cash sales to the KB Homes, then they include the price of the system in the home price.

Solarcity's primary strategy with home builders is to not sell only, but also to have an option to lease/ppa with the new home buyer. So far, as far as Bob Kelly has noted, home buyers like the lease/ppa(saves money) and home buyers are choosing lease/ppa which might be an indication of preference for convenience, immediate savings, or peace of mind.

Overall, I think we should see SWPR get more into the Solarcity "retail" game over the course of the year.(which indicates they Solarcity might be onto to something right here.) Besides, the turnaround on utility projects is long, residential much shorter. Therefore growth can be more immediately experienced with a heavier mix of residential.

 

[futureproof]

Woodside Homes making solar panels standard feature | Las Vegas Review-Journal

Just read this article about a Nevada homebuilder believing the no up-front cost option is advantageous to its home buyers... might be more support for lease/ppa choice of the broader PV market.

 

[NigelM]

Mod Note: some posts went to snippiness.

 

[HenryF]

(this time without snippiness)

futureproof, Yes point taken. I was specifically addressing the remark that SPWR's powerplant business is more lucrative than SCTYs on a per unit electricity basis.

SCTY gets rates that a consumer typically pays utilities. SPWR's power plants make money that the grid typically pays electric generation powerplants.

I don't know how everybody's electric bill looks like. Mine has three rows:

Supply Charges: $1 <-- this is the price of producing electricity (at utility scale)
Delivery Charges: $2 <-- the cost of the grid
-------------------
Total Charges: $3

SPWR makes the equivalent of Supply Charges.
SCTY makes the equivalent of Total Charges.

 

[futureproof]

HenryF +1

 

[Calvin.K]

"SolarCity strength attributed to takeover speculation" April Fools?

 

[dalalsid]

"SolarCity strength attributed to takeover speculation" April Fools?

Takeover by who?

 

[HenryF]

it makes no sense to look at book value

when analysts refer to growth in the context of valuation they speak of earnings growth and not revenue or any other growth.

"Throughout his letter to shareholders, Buffett focuses on per share results. He compares the growth in Berkshire’s book value per-share to the performance of the S&P 500."

Buffett gets beat by the SP 500 over five years. (But wins over six.) - The Term Sheet: Fortune's deals blogTerm Sheet


Do a google search on "Warren Buffet Book Value" - you will find plenty of stuff.

I am not sure why BookValue/Share is freaking people out so much here.

 

[futureproof]

HenryF, good to note. I was wondering if you had some kind of "growth and execution equation/quotient" you ever applied to an equity. Meaning, is there something out there that can account for growth potential and execution other than past quarterly or traditional metrics? I use Tesla as an example... Back in 2012, I was reading brokerage reports, analyst reports as I was making my investment decisions and every single one of them said it was a bad stock. I sat in the MS one day, experience the product first hand, evaluated the company, learned it had an extensive backlog on reservations, saw where the company was going with product deployment, supercharger deployment(solar power), environmental impact, and energy industry impact... and knew this was going to be a fantastic long term investment... the numbers and analyst said no, but my gut(growth probability) reaction was saying yes. Is their something (other than gut) out there that measures this growth/execution probability for a stock, even if past quarterly performance indicates otherwise?

On another note...

Former chairman and CEO of Chrysler Robert Nardelli made a great point about Tesla, that sparked a big idea on Tesla Service. I explain how Solarcity works into this in a second....

He gave an example of his friend getting a message from Tesla that his 12 volt was functioning appropriately and will need to be replace even though he has no idea the problem existed. Nardelli went to say his advantage is big data, market focus, customer centric. Customer loyalty FOR LIFE. Why?

What happens when you can diagnose the problem before it gets to be a problem? You don't need a lot of SERVICE/WARRANTY/REPAIR. Things last longer. Every single MS/Roadster sends DATA back to Tesla every day. By far, the most connected car brand to its customer on earth right now. Parts and repair service COSTS are minimized. RESIDUAL VALUE goes up. RESALE/LEASE become more attractive. Customers love to hear that and buy more Teslas.

How does this apply to Solarcity? Solarcity has the same big data capabilities. Everyone of their customers system performance data is collected. If something appears to be hurting performance, they will fix it before it needs to. But you say, PVs don't breakdown. Maybe it is more to keep degradation low, as well as, prepare for energy storage management as well... or just maybe... Tesla and Solarcity will work together to provide energy usage data on VEHICLE CHARGING at the home and at the Supercharger to also add to the big data on car performance. If they know how the battery is being charged and discharged, then they can tailor all service calls even more so. As Solarcity big data grows, so too does the Tesla big data and this can get very interesting very fast.

I just saw an interview with Elon sitting next to Philip Low(he's wearing an Occupy Mars t-shirt by the way). Philip Low is developing a device (iBrain) to record neuro data on hundreds of thousands of people at the same time creating big data scale capabilities in order to see if people are diseased before they have symptoms. Looking for patterns in the massive amounts of data that otherwise wouldn't be available. Many reasons probably, but could Elon be trying to get comfy with Phillip for the reason of applying this to Tesla, SpaceX and Solarcity system performance? Makes sense if you think fixing things before it's too late is helpful to your business and customer acquisition/retention...

 

[futureproof]

Just received an Mckinsey and Company email with this article on disruptive power of solar...

The disruptive potential of solar power | McKinsey Company


Overall, solar is being "pumped" everywhere I look this week... hope this isn't just related to just short term stock momentum but more of a greater trend of spreading awareness...

... also received a marketing email from Solarcity today... not sure how they got my email, maybe through my investor relations emails or signing up to listen to the conference calls, not sure how, but this could be part of the new marketing push. However, I'm not one for marketing emails... tend to just delete.

 

[Norse]

SolarCity Shareholder Alert: Former SEC Attorney Willie Briscoe and Powers Taylor Investigate Possible Breaches of Fiduciary Duty by Officers and Directors

http://pdf.reuters.com/htmlnews/8kn...&u=urn:newsml:reuters.com:20140401:nBw016612a

 

[NigelM]

SolarCity Shareholder Alert: Former SEC Attorney Willie Briscoe and Powers Taylor Investigate Possible Breaches of Fiduciary Duty by Officers and Directors

http://pdf.reuters.com/htmlnews/8kn...&u=urn:newsml:reuters.com:20140401:nBw016612a

Briscoe seems to initiate a lawsuit every other day against one company or another. Frankly it's legal blackmail (the companies usually settle to make them go away) so it's tough to read anything into it.

 

[Canuck]

It always bothers me when headlines use words like: "Former" along with government branches (in this case the Securities and Exchange Commission) as if the SEC is doing an investigation - note the next words are "Investigate Possible Breaches". In reality, this is a law firm announcing that a class action lawsuit has been filed and seeking participant shareholders. Yet they are only investigating "possible breaches". Big deal.

 

[futureproof]

Briscoe seems to initiate a lawsuit every other day against one company or another. Frankly it's legal blackmail (the companies usually settle to make them go away) so it's tough to read anything into it.

NigelM, agreed.

 

[futureproof]

Quincy mayor signs 20-year deal for solar power - News - Wicked Local Quincy - Quincy, MA

2MWs to Massachusetts municipality under Solarcity 20 year lease contract... more high quality long term payments to package up for the ABS market... more MWs to get installed for the lowest cost of capital possible... reinforcing the positive cycle...

 

[HenryF]

@futureproof, I am not aware of any such quotients. Just like you, both my Tesla and SolarCity investments started with qualitative analysis to begin with. I used some fuzzy math to get a rough idea of what the size of addressable market is etc. Much of the growth projections I used were based on official and un-official guidance, and some rough assumptions. Analyst projections in early 2013 were beyond stupid and didn't make any sense.


Obviously for Tesla there is no way we can use historical data to predict the future. Much of it's growth happens in step changes: Roadster to Model S, Panasonic battery factories in 2H2014, Model X, Gen-3. There is some amount of continual growth in between these step changes but that's not what most long-term investors are after.


On the other hand I see SolarCity having smooth consistent growth, verifiable every quarter, on an year-over-year basis, using revenues or MW deployments or Retained Value or Book Value per Share (BVPS). So I feel lot more comfortable using historical data for near future projections. But again, we don't need to make any assumptions. Everything we need to forecast is already available as official or un-official guidance in public domain.


2014 will be fun time to watch SolarCity in a fundamentals perspective. Based on everything I see, they will grow shareholder value at a faster pace than MW deployments (which is already at 100%+ growth rate). As you can tell I'm firmly positive on SolarCity for years to come.

- - - Updated - - -

@futureproof, I was having a chat with friend who is a very senior engineer and he is into automotives, energy, batteries etc. I said I expect all SCTY stationary batteries to be internet enabled. They will be able to provide smart services like alerting users on smart-phones if say grid is out and battery is about to run out etc. Then he said, well if batteries will be internet enabled, they can do a whole lot more with it. The entire distributed network becomes a virtual grid that SCTY can program and control. So he thinks in addition to providing localized peak-demand shifts, they will be able to provide some grid services and charge grid for it!


Honestly, I don't know how much of it will come true or how big of a deal it is but all I can say is Musk and co never think small. They think big, as in 'really really big'. So never hurts to be a long-term shareholder of Musk enterprises.

 

[futureproof]

HenryF, I also think Solarcity gives a little more visibility. My dilemma was how I was going to invest in "Elon" when Tesla's stock price exploded in April-May time period. I was dead set on accumulation of both TSLA and SCTY at the same time and weighed more toward Tesla. However, after many sleepless nights(I know why, right?) I decided to weigh my accumulation efforts more toward SCTY. For one, the shares were over 5 to 1 cheaper (at the time) and I also saw their potential growth being bigger. I felt guilty for investing less in Tesla at time (and depressed since SCTY was going in opposite direction (summer 2013), but I thought to myself this is still part of my belief in Elon's et al.'s vision, so I went with it.

I just looked at the numbers again on what Solarcity aspires itself to look like on July 4, 2018:

1 million customers.

6GWs installed.

$500mln annual free cash flow rate.

Let's say they hit the 1GW(total) mark in Q4 this year. That means they will have to install 5 more GWs in 3.5 years. If they compound like they are, that means 1GW(2015), 2GW(2016), 4GW(2017), 4GW(mid2018)... for a total of 12GWs by the 1mln customer goal time frame. That's seems like a wild number, almost unthinkable... I supposed that would also mean about 2 million customers and rough estimate of $1bln in free cash flow. But just for giggles, If today's stock price were attached to 12GWs, 2 million customers, $1bln in free cash flow, would that be an appropriate value(undervalued or overvalued) to give it?

Now back to the numbers Solarcity gives... they would have to get up to a run rate of about 1.5GW/year by 2016 to get to GW, which would decelerate their current growth rate by a lot, so it makes me feel they are being conservative in their estimates. But when does the law of big numbers start to kick in? With such a large addressable market, it seems like a lot longer then in the next 4.5 years, IMO. So, does today's stock price reflect 6GWs, 1 miillion customers, and $500mln annual free cash flow rate?

Unless Bob Kelly has a modified definition of free cash flow, but $500mln of FCF means thats cash after capex, so they will have cash left over even with it's growth rate to get to 1mln customers and 6GWs. Again, is today's stock price priced in for this?

Now, I'm not sure the $500mln FCF applies to compound growth, but if does continue to compound into 2018, will they be able to amass enough capital at that growth rate through ABS and their new individual level ABS?

 

[HenryF]

Quincy mayor signs 20-year deal for solar power - News - Wicked Local Quincy - Quincy, MA

2MWs to Massachusetts municipality under Solarcity 20 year lease contract... more high quality long term payments to package up for the ABS market... more MWs to get installed for the lowest cost of capital possible... reinforcing the positive cycle...

This is a positive news overall. But putting these three statements together, something is a miss:

Mayor Thomas Koch has signed off on a 2-megawatt solar-power project expected to account for about 10 percent of the city government's total energy consumption.

Koch’s office said the deal with SolarCity will last 20 years and will not cost the city any money.

The agreement sets a 9.6 cent rate per kilowatt-hour for the electricity over the full term of the agreement, Koch’s office said. The current rate being paid for electricity can reach as high as 13 cents or more per kilowatt hour.

** This is a good deal from the city point of view. Then why are they stopping at 10% consumption? Why not 20 or 30 or 40 or even 80? What's the limiting factor here? Could it be the amount of available roof space? Is it SolarCity's reluctance to commit more capital? Any thoughts here?

Answering these questions helps us understand the size/nature of the addressable market better.

 

[futureproof]

@HenryF, I think the reason they don't do more Solarcity MWs is because of the contracting process. Most(not if all) of the MWs will be put on schools, which seems to me to be a single contract bid process. They could be in the process of bidding on other government buildings, but that's pure spec.

Just as with Quincy, recent residential 2013 market share numbers appear to indicate further support for a strong leasing/ppa market. The top two(Solarcity, Vivint) gained more market share well over the next handful of competitors, and they attribute much of their market share growth to lease/ppa. Solarcity gained from 16% to 26% (although it seems to have gone down from 32%? Is this correct?)
Vivint is second in market share with 8%, however, Vivint's growth rate is the fastest, up from just 1% of market share in 2012. I wonder what's their secret sauce?

KW14SolarServer

It is interesting to note that Vivint's COO joined Solarcity about four months ago. Breaking: Vivint Solar COO Jumping to SolarCity, Plus Other Greentech Exec Moves : Greentech Media
And the CEO of Vivint left for Solarcity last February. Green Jobs: Tanguy Serra Now COO at SolarCity, Plus Vivint, Soltage, Nexant : Greentech Media So, maybe more of that Vivint growth will go Solarcity's way (or could it mean Vivint got rid of what was dragging them down?)... to be determined, right...

Also, did some more back-of-the-envelop numbers... If Solarcity maintained 26% market share through complete market saturation of 42 million buildings(static number, no new roofs), assuming the average system per roof is 3.5KWs, they would have installed 38.44GWs worth of PV systems. If they achieve a 1.5GW/year rate, it would take nearly 25.6 years to achieve. If 2GW/year, over 19 years, if 4GW/year, 9.5 years.... and if they keep the current compounding growth rate, they would achieve 38.44GWs in 6 years, by Q1 2020. Bottom line, many many assumptions, makes an blank out you and me, but even so, were talking about dozens of GIGAWATTS with just household level systems... if it does turn out to be 38 GWs, that like building 38 nuclear power plants worth or generations capacity.

What does a 38GW energy company look like in terms of market valuation? What does that stock price look like, lets say give 100m shares, or maybe 200m shares outstanding? (not sure how much employee plan would dilute, or how many secondaries will be offered).

 

[HenryF]

@futureproof I'm on my way out to a vacation, so will give a few quick remarks.

Deutsche Bank put a price of $90 based on cumulative installs of 9GW by 2020 and 1% growth rate after that. Many times in the document they themselves said it is very conservative. You can get a copy of their report for free at dbresearch.com click Contact at the top and fill out a small form.

26% market share is for the whole of 2013.
33% market share is for Q4 2013 alone.
Market share has continuously increased.

Per SolarCity, average system size if 6KWs by the way. But they include commercial with residential for the calc. Also they do the same, include both residential and commercial properties, for the 42mil building count.