SolarCity (SCTY)

[FluxCap]

OK guys, I think it's time to relax and step away for a bit. There's plenty to talk about in the weeks and months to come regarding SCTY without diverting to personal attacks. I happen to share Sleepy's skepticism of SCTY and am positive Curt didn't intend this thread to be an SCTY Cheerleading club, but an open discussion. Keep it on target.

 

[futureproof]

Here are some quick numbers on possible lease growth... 700k new homes were built last year in the US and only 200k residential PV systems were installed on any home, new or old. SolarCity has over 100 homebuilders they are working with, and in Bob Kelly's talk at ROTH he stated that these partnerships are finding homebuilders( and buyers) are lease leaning in preference right now. If this is true, then I'm going to go out on a limb and say Solarcity might gain a good share of the new home building market, which if they can reach 28% of it over the next couple years, would be more Solarcity residential installations in just new homes then occurred over all 2013 by all installation companies. If these turn out to be mostly leases, then just working on the new home market would be a major reoccurring revenue generator and retained value multiplier alone.

Lease seems, intuitively, to be an option that appeals to a wider market in general. Yes, there is a big market for purchasing outright, but overall that market is much smaller than lease I think. It appears that not everyone can buy or want to commit to additional debt; but, everyone wants lower electricity now and can purchase power without the risks, i.e. the lease market (although not for everyone). Therefore, Solarcity might continue to see big lease numbers as they scale up, even during the remaining years of the 30% ITC right now...

I think it will be interesting to see the $0 down loan sales numbers look after 2014. I'm sure they are going to spike since ownership is still a big underserved market. Just a matter of how much volume compared to leasing volume that will be telling I think...

 

[tslafan123]

Another example of economies of scale:

SolarCity Announces Major California Expansion, 10 New Operations Centers - Nov 25 2013

SolarCity will now have a location within 30 miles of more than 90 percent of the state's population.

"This expansion not only allows us to spread job creation and economic impact to more local economies, but it also allows us to reduce our costs and environmental impact by decreasing drive times and increasing installation efficiency," said Tanguy Serra, SolarCity's executive vice president of operations. "The fact that this is happening as California's largest state incentive program is winding down is a key indicator of how far solar power has come toward the mainstream."

>> Is there a a little guy in every 30 mile radius to outcompete SCTY's efficiency in this perspective?

 

[eepic]

Having just caught up on this thread, I propose we stick to addressing specific points of debate and it seems for some of them you'll have to agree to disagree.

@sleepyhead
- First, I am in the same boat where I have not done enough due dilly to be as comfortable with the long term business plan of Solarcity as I am Tesla. I agree that the financials and valuation are much trickier, and there's too many questions I don't have enough clarity into yet. There are several red flags for me as well (tho I believe most or all can be answered with some research)

- I'm just starting to do some research into purchasing and installing a system in the summer and there seems to be a ton of homework to do (equipment choices, permits, installation, maintenance, insurance factors among them) that's far from trivial. Unfortunately, there is one company in the Toronto area (FIT, no rebate) that provides Solarcity like propositions but they seem to have very mixed reviews so I'm hesitant to approach them. Could you point me to some good resources and guides to these choices if you have some handy? I'm particularly interested in learning why you say Solarcity's hardware is inferior to other providers (is it hardware efficiency? aesthetics? reliability/durability?)

- I would respectfully disagree that the leasing option is necessarily unethical or a bad choice for consumers. The cost economics you quote for your argument (which I agree in your case) may be completely different depending on geographic location, as an identical setup may generate a very different amount of power over a year, and the grid power rates could be very different. Cash flow is king, and not having to front any payments while receiving an instant net monthly benefit is a great service to many consumers. Solarcity takes on a non-zero amount of cost and risk, there's no reason why they shouldn't charge some what of a premium as long as it's disclosed.

 

[tslafan123]

In different contexts both Bob Kelly and Lyndon Rive said that through Zep acquisition the labour productivity "doubled". This is not only lowering costs but increasing the customer satisfaction.

>> Does local guy have Zep equivalent components?

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What are the local guy's customer acquisition costs? Could it be that SCTY has the lowest cost?

 

[futureproof]

I would respectfully disagree that the leasing option is necessarily unethical or a bad choice for consumers. The cost economics you quote for your argument (which I agree in your case) may be completely different depending on geographic location, as an identical setup may generate a very different amount of power over a year, and the grid power rates could be very different. Cash flow is king, and not having to front any payments while receiving an instant net monthly benefit is a great service to many consumers. Solarcity takes on a non-zero amount of cost and risk, there's no reason why they shouldn't charge some what of a premium as long as it's disclosed.

eepic, +1. I suspect for this reason, the market is much broader for lease/ppa compared to purchase. I think it will truly come down to customer service, and right now, Solarcity has maybe the most widely recognized and arguably reputable brands in the residential business. I state this only because I see they've gone from 12% market share to 32% market share over the span of 2013. I read that as consumers find Solarcity a more compelling brand right now.

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Now if lease/ppa numbers remain strong, then Solar Asset Back Securitization will be strong as well. Each high quality, reoccurring monthly payment that they get will enable them to finance further growth without relying on tax equity investors(which is tied to 30% ITC), or do secondary stock offerings(which dilutes shareholder value). If the pool of lease/ppa gets large enough, Solarcity could potentially self finance in perpetuity and that would be very, very good since Bob Kelly estimates ABS interest rates are looking to fall to prime mortgage rates, so cost of capital will the cheapest it can possibly get. If all continues well for lease, this recent 200mln in debt financing will be soon put out to ABS market, and again, lower cost of capital to levels unmatched. Now enter in the common investor "crowd funding" ABS projected to start later this year, and Solarcity might be able to tap billions more in capital for many years worth of future installations.

ABS, to me is the future of Solarcity financing, so if it continues to go well this year, I feel, at the moment, they have a good probability of achieving their 1mln customer goal as well as multi GW installation aspirations by 2018 and for many years after that.

 

[Mario Kadastik]

Continuing on my questions on SCTY model for customers. Let's assume you take the lease option and install say a 5kW system on your roof and let's assume it produces yearly 5MWh of power (for simplicity sake let's assume you're north enough that you get that). This means that if you took the leasing deal for 20y you pay per year 5000*0.08c for example or $400. So in 20 years that's $8000. However how does this work? In the summer you produce and in the winter you don't. Also let's assume your yearly usage is in fact 6MWh so in the winter you need to buy from the utility and in summer you probablys till do it in the night and sell in the day. How does that accounting work out for the customer? Who handles the selling to grid and buying back from grid and all the billing.

I really would ask SCTY, but i doubt they answer for non-US residents

 

[tslafan123]

Here are some quick numbers on possible lease growth... 700k new homes were built last year in the US and only 200k residential PV systems were installed on any home, new or old.

I agree this is a positive in terms of market opportunity. We should normalize correctly though. SolarCity says only 14 states are addressable, given the cost of competing utility electricity, sun shine and local incentives. So the 700K number may not all be addressable homes. It would be nice to know what the right number is though.

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- I'm just starting to do some research into purchasing and installing a system in the summer and there seems to be a ton of homework to do (equipment choices, permits, installation, maintenance, insurance factors among them) that's far from trivial.

- I would respectfully disagree that the leasing option is necessarily unethical or a bad choice for consumers.

When I used to actively read on Seeking Alpha, I encountered number of commentators saying that they spoke to dozen+ customers of SolarCity to understand their experience before committing big money into the stock. I also read a number of customers where they did cross shopping between local companies and SCTY. They almost all universally said many small firms, working through contractors had zero clue for many specific questions. They felt that SCTY was the most informed, most professional in dealing with customers. I'll dig around and post some links here.

All of this I read way back in early to mid last year. I was convinced that SCTY will do very well. Proof is in the pudding: SCTY's continual market share growth speaks for itself. It was very foreseeable.

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Here is an example comment from 19 Dec 2012:

"I am also working with them as we speak to put a 3KW system on my roof in CA. I did shop around to see who wanted my business most. I am proactively putting in a bigger than my current requirement as I have a Model S on order. Working with Solar City vs. all others (and there were more than 3 vendors I talked to), was like dealing with a super-specialist vs. a quack."

Link

 

[futureproof]

In summary, these are the characteristics of SCTY:
- Book Value of $800Mil
- 100% growth rate
--- Track record of 100%+ growth over last 7 years
--- Official guidance of 100% growth this year (on a MW deployment basis)
--- Un-official guidance of 100% growth rate for next two years 2015/2016
--- Official guidance of 70% growth rate up to 2018

- S&P 500 P/B average over 25 years is 2.85
- S&P 500 growth of Book Value over last 25 years: 6.5%

You guys tell me how much SCTY should be worth now!

Teslafan123, I think you hit it on the head. The growth rate is phenomenal right now. If they can continue to execute on that growth rate, their book value will look very much different a year from now and really different beyond that. I think when potential investors see that, they jump in as soon as possible, and given there are only about 90mln shares outstanding, the price jumps up... a growth premium is paid for what it will be... right now, some people think the growth premium is too high and want it discounted. Right now, I don't think anyone can really pinpoint the value of the growth since it so extreme... so I feel whatever the market ends up going to is what that growth premium is worth.

I compare this to Tesla about a year and four months ago.... they had about $80mln in cash on hand and producing 250 cars per quarter. Many people said it was extremely overvalued at $30 per share. Fast forward to today... they have $3 billion dollars in cash on hand and are racing toward a 1200 car per quarter production rate with a gigafactory in the works... looking back, $30/share was a massive steal for all those who bought it then.

I feel Solarcity is on a similar growth trajectory and it's value now ought to be based on where you think it will be next year and beyond. At the current growth rate, I personally think it is a good possibility it will reach the valuation levels you have suggested in earlier post (6x current value) and maybe even higher as we see the effects of scale and expanded low cost financing comes to fruition... so if this is where you value it as well, then current stock price could look very, very attractive right now.

 

[tslafan123]

Here is another example from 18 Dec 2012

"I have purchased two separate solar systems for my house from SolarCity. It was the best service company I have ever worked with. Over several years of having solar installation companies come out to my house and give sales pitches I was frustrated as they all seemed to be poorly equipped at doing a professional installation. I had SolarCity install the first 3kw system about two years ago as a purchase. They were totally professional. They did a sight survey using google earth, then came out doing a local survey. They had a detailed schedule of how long the process would take and created drawing which they emailed to me to approve. They took care of all the permiting and worked with my utility company. I can monitor the output on the internet. The second set I got a year later as a lease. They have been trouble free. I had a question for them and as I was typing it into their webpage I got a call from SolarCity saying they saw I had a question and wanted to answer real time. This is not just a normal contractor. I have bought their stock as I see them as a really unique and pleasurable service experience."

link

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Comment from 8 Mar 2013

"Recently retired and living in Phoenix, I have contracted with Solar City to lease a 4.56 KW P/V system. At the same time, and within a few weeks of the public offering, I purchased 100 shares of stock. With the anticipated savings over the next 20 years I intend to dollar cost average the purchase of additional shares of SCTY. The prospects for my retirement are as "sunny" as the Arizona skies."

link

Does this ring a bell? A happy customer buying shares? Guess which other company has this kind of charm??




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Here it is - from 14 May 2013

"One thing I would ask anyone who is talking with uncertainty about SolarCity, have you spoken directly to any of their customers? Seems silly, but real business professionals go right to the source because if you don't have happy customers you won't be in business very long. Before I invested 6 figures in this company I did just that, I spoke to over 25 customers in all the states that SolarCity services. How many customers did the author speak to about SolarCity? SolarCity is a new way of doing business and this scares people who don't know how to think outside the box. SolarCity is for the long term investor and people that actually wish to make an impact on global warming and foreign oil dependency (nobody ever really talks about this aspect of it). Long SCTY."

link

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MODS: I didn't mean to make this a campaign of some sort. I am just showing how the business growth was very foreseeable way back when it was trading in teens.

I didn't see a single post from a pissed off customer. As I said before I have been investing in SCTY since it was in teens. As I demonstrated with numbers in my earlier posts, the stock is severely under-valued even now. The primary reason is misunderstanding in various angles to various degrees by most people. If it falls, I'm happy for it, I will just buy even more.

 

[futureproof]

Teslafan123, I wish I could break down those 700k new homes to get Solarcity's addressable market... I'm going to assume it might be above 400k because of the large population bases within it's 14 states. Still figure, in a general sense, it's a big, big number of new homes they'll have access to in there market. Haven't heard any analysts talk about this in their growth conversations.

I think pointing out satisfied customers is good. I've looked a yelp and have noticed a couple bad reviews, but most didn't seem like customers but people that chose other installers over Solarcity. Also, Solarcity has only about 30-40 total reviews, so I'm assuming most the 100k customers are satisfied or don't care enough to go on yelp to voice their opinion.

With strong customer satisfaction, maybe the Solarcity service premium is correctly valued. But, still have to see how scaling will affect this satisfaction level. Might get more feedback over the course of this year in that respect.

 

[tslas]

Continuing on my questions on SCTY model for customers. Let's assume you take the lease option and install say a 5kW system on your roof and let's assume it produces yearly 5MWh of power (for simplicity sake let's assume you're north enough that you get that). This means that if you took the leasing deal for 20y you pay per year 5000*0.08c for example or $400. So in 20 years that's $8000. However how does this work? In the summer you produce and in the winter you don't. Also let's assume your yearly usage is in fact 6MWh so in the winter you need to buy from the utility and in summer you probablys till do it in the night and sell in the day. How does that accounting work out for the customer? Who handles the selling to grid and buying back from grid and all the billing.

I really would ask SCTY, but i doubt they answer for non-US residents

We have something called NetMeetering, which keeps track of /month. In summer we produce more and it is credited in your account (At least for JCPL) and in winter you produce less, and you use balance from your credit, if credit is not there, you get charged regular rate. If it is 0 down lease, solarcity keeps track of how many kwh was produced every day/hour. You get monthly bill based on kwh produced.

 

[ggr]

... The situation was that someone looked into a 10kWh battery storage unit and SCTY said that it costs $2k, which is ridiculous because that is $2,000/kWh and we know that Tesla makes these batteries for $250/kWh. ...

Actually that's $200/kWh, unless you misstated one or the other number. Please note: no criticism expressed or implied.

Edit: I quoted the wrong post number, and don't know how to easily fix it. The actual quote is from about 5 articles above the one the link would take you to.

 

[joefee]

Cash flow is king, and not having to front any payments while receiving an instant net monthly benefit is a great service to many consumers.

+1 !

 

[killer_model_s]

For SCTY, it's ridiculous to compare current revenues and earnings to market valuation. Please read my earlier post #41 to get a better idea.

You must be either very young or weren't around when the tech bubble burst. The above phrase was sadly all too common in those days.

How come no one is addressing the impact of the change in legislation in 2017 on SCTY? It's a major problem for the company and there hasn't been ANY discussion on this in this thread.

 

[tslafan123]

You must be either very young or weren't around when the tech bubble burst. The above phrase was sadly all too common in those days.

I am going to assume that you didn't read Post #41 before spitting out that blurb. Let me help you. No one is saying that SCTY doesn't need to make money. It's just that they make it over time. SGA is a major component of an installation business. All of that amount is recorded here and now, while the revenues are prorated over time. That crates this fictional loss in accounting statements.

Lets thinks of an era before SolarCity existed. How much money (or profits) would a power-plant be making while it is being built? It doesn't make any money while the plant is being built. Even after it's built, it takes time for it to recoup it's original investments and subsequent profits. Does it mean all power-plants are loss making entities and none of them should ever have been built? SolarCity is exactly the same. They are building mini power plants on rooftops with upfront capital which they will recoup over time.

If they are making losses in a traditional sense their Shareholder Equity (aka Book Value) on Balance Sheet would be shrinking. But it's actually rising at a very fast pace. Take a look at their filings.

Also, take a look at Post 20 and Post 41. You will get a better idea.

I have seen an awful lot of people on Seeking Alpha and everywhere else that come out and proclaim "solarcity does't make money" all the way from Jan 2013. If they have been shorting, they would have lost money dearly. Evidently short interest is very high in this name even now. Eventually sanity will prevail. Ignorance/stupidity has a price to be paid.

How come no one is addressing the impact of the change in legislation in 2017 on SCTY? It's a major problem for the company and there hasn't been ANY discussion on this in this thread.

Take a look at "Fourth Quarter 2013 Earnings Conference Call" deck from Feb 24, 2014 - slide 8. Their costs came down by aprox 40% within a span of 1.5 years! If you look at Lyndon Rive videos on YouTube you will see they successfully navigated through each of the state incentive reductions. They are very well equipped to deal with the ITC cuts. In fact they are already reducing their dependency on tax equity funds by raising capital through syndicated loans, asset backed securities, etc. Also a crowd sourcing platform is in the pipeline. Overall, I don't see anything to worry about here.

 

[futureproof]

Take a look at "Fourth Quarter 2013 Earnings Conference Call" deck from Feb 24, 2014 - slide 8. Their costs came down by aprox 40% within a span of 1.5 years! If you look at Lyndon Rive videos on YouTube you will see they successfully navigated through each of the state incentive reductions. They are very well equipped to deal with the ITC cuts. In fact they are already reducing their dependency on tax equity funds by raising capital through syndicated loans, asset backed securities, etc. Also a crowd sourcing platform is in the pipeline. Overall, I don't see anything to worry about here.

To add, I believe Solarcity had developed a cost reduction road map back in 2012 in preparation for incentive reduction. The goal was set at 5% in cost reductions per year. They currently are reducing costs 6 times faster then 5% annually, so very, very much ahead of schedule here. This essentially puts them 5 years ahead of projections. I'm not sure how much further they can go down, there has to be a slowdown of reductions at some point, but right now they are really executing extremely well.

The 30% ITC reductions in 2017 affects everyone in the solar industry, not just Solarcity. Since there will no longer be a 30% tax credit on your purchase, $0 down loan payback periods get extended from 3-4 years to potentially 7-8 years, which could be a deal breaker for a potential customer. I think the average home owner owns their home for 10-11 years before selling, so having to wait potentially 8 years for payback on PV system might be too long. The $0 down loan market might show signs of deceleration and get hit hard. Leasing market gets hit because of the tax equity investor no longer becomes a source of capital, as well as the installation company's access to the ITC for its own cost reduction strategies.

Everyone gets hit. However, those that reduce costs the best, will be the big winners here in the residential market. If they can reduce costs to the point the 30%ITC doesn't matter, then they will be able to continue rapid growth in massive market with extremely low penetration. Solarcity is positioning itself very well with its fantastic execution on cost reductions. But just as important, as Teslafan123 points out, they are shifting nicely to non-tax equity investor sources of capital, such as their solar ABS, and crowd sourcing ABS product coming out later this year. No other solar energy company has done this yet, Solarcity is the only one right now. Given this status at the moment, Solarcity is proving to be the only solar energy company prepared for the post 30% ITC world.

The next major hurdle for the solar industry is dealing with net metering reductions and the utilities. The solution to that is energy storage. Energy storage is the absolute future of the Solar industry. Without it, the utilities will always be in control of its destiny. As we can see from what happened in Arizona last November, utilities can change net metering agreements, quite literally, overnight. So energy storage is top priority. Solarcity, again, is positioning itself to the first with a low cost energy storage solution through its partnership with Tesla. No one else has this advantage. I have a strong feeling California Public Utility Commission will get the Solarcity energy storage hook up issues resolved soon. California has a strong mandate to achieve 1.3GWs of energy storage by 2020 and current intentional "road blocking" by all the California utilities will soon dissipate. As those road blocks start to fade, Solarcity has a long queue of customers waiting to get the battery installed immediately. Elon also stated in his Amsterdam talk that he wanted to begin a volume energy storage roll out by the end of 2014 at the earliest and in the first half of 2015 at the latest... so the feeling to me is that energy storage is going to happen sooner then later.

Overall, with accelerated cost reductions and the roll out of low cost energy storage, Solarcity is currently positioning itself above every other solar power company to thrive post 30% ITC world as well as post net-metering...

 

[eepic]

thanks for the examples tslafan123

Quick question for those who are up-to-date with what's happening, what was behind the delayed and restated earnings recently? That sort of thing gives me a lot of uneasiness unless there's a really good reason why it happened.. I'm not sure I trust what the media says about it so I'm hoping you folks could paint the full picture.

 

[tslafan123]

thanks for the examples tslafan123

Quick question for those who are up-to-date with what's happening, what was behind the delayed and restated earnings recently? That sort of thing gives me a lot of uneasiness unless there's a really good reason why it happened.. I'm not sure I trust what the media says about it so I'm hoping you folks could paint the full picture.

You are welcome.

They did an entire call about it. You can check it out at investors.solarcity.com if you are interested. I didn't listen to it. Also, it came up once or twice in the subsequent call as well. From all I can tell a) Key metrics weren't affected, especially Retained Value b) Some of it has to do with recent acquisitions. Overall I felt like it was not something to be too concerned about. I considered the recent drop in the price due to these concerns as a buying opportunity. I am a long term investor with plans to hold at least 5 years. All this stuff will fade away over time.

 

[futureproof]

They did an entire call about it. You can check it out at investors.solarcity.com if you are interested. I didn't listen to it. Also, it came up once or twice in the subsequent call as well. From all I can tell a) Key metrics weren't affected, especially Retained Value b) Some of it has to do with recent acquisitions. Overall I felt like it was not something to be too concerned about. I considered the recent drop in the price due to these concerns as a buying opportunity. I am a long term investor with plans to hold at least 5 years. All this stuff will fade away over time.

To add, I've come to learn with high growth companies a restatement is not uncommon. However, I didn't like learning about it, and I'm sure Bob Kelly wasn't too happy to discover it either. However, I give great weight to how a company deals with problems like this when they arise. In this case, I feel Solarcity is dealing well.

If you look at the past year as a whole, Solarcity has had a whirlwind of changes... they went from 31k customers to 93k customers, from 150MWs in 2012 to nearly doubling that to 280MWs in 2013, opening over 10 new offices, a new Nevada operations center, acquiring Zep and Paramount, going from 2K employees to nearly 5K employees, and a laundry list of other crazy growth events... given this, I think the probability of some accounting error was significant...

Moreover, the stock price had gone from about $16 to $50s by May of 2013, which triggered Sarbanes-Oxley Act(SOX) compliance. SOX was a response to Enron and Worldcom scandals to protect shareholders from accounting errors and fraud. Solarcity triggered SOX when it went over $30/share, so they were heavily audited for much of the remainder of the year, and you can imagine this happening in the midst of all the growth events. 291 controls were evaluated and assessed. The overhead allocation issue popped on the radar as a problem.

Overhead allocation for leases was under represented compared to cash sales due to an calculation error(burden ratio). I think this error become more apparent as they had a big jump in lease installations where in 2012 those numbers weren't as pronounced(this is just my speculation). In any case, they corrected the allocation error and as a result, none of the critical metric of evaluating the company's strength changed as Tslafan123 pointed out. Solarcity is SOX compliant in every area and expects to have all remedies (beefed up accounting staff and strengthened systems/protocols) by Q2.

With this response from Solarcity, I feel they have demonstrated transparency and resolve to prevent such an issue from surfacing again. Doing such, I am still confident they will continue their compounding growth with minimal/no disruption due to this specific issue. Still on track to achieve their 2018 1mln customer goal, IMO...