SolarCity's Musk Ethos
@davet, I've been lurking since 2012, not much for posting on too many sites, but was motivated to start here recently. Hope to hear more of your "mega" thoughts on Solarcity as well...
Just got done reading through all the pages here. I'll start sharing some of my SCTY thoughts here. I've posted some long posts on SCTY in the past (on the old thread) so it kind of feels I might be re-hashing some of what I've posted in the past. But we'll see where it leads.
Here's a few starter points:
1. International expansion - one thing that people are missing here on this thread is the inevitable international expansion of SolarCity. In a recent conference call, Lyndon Rive noted that they've discussed international expansion in the past and it's likely to come this year. They'll probably acquire an existing company in a target overseas country and basically re-brand that company into SolarCity with all of SolarCity's systems (ie., marketing, ordering, system design, installation, maintenance, financing, etc). This will allow them to expand much quicker than if they were to start from scratch in another country.
2. The Musk ethos - Tesla, SpaceX and SolarCity all have a religious fervor to cut costs on all levels through constant and unending iteration. This is the main competitive advantage of SolarCity. One example is with their acquisition of Zep Solar (ie., see mount installation,
Zep Solar ZS Tile Installation video | RENVU.com - YouTube). Solarcity installation teams are now able to install 2 systems in a single day with Zep's fast-install mounts. And with the Musk ethos, they will continue to improve their mounting systems even further.
Some people look at SolarCity as an installation company but I think that's missing the point. SolarCity is really just getting started. Here's how I look at their evolution.
1. Early stages (2006-2011) - discovering how to thrive in the solar industry. Focus on the high value-add first (ie., bringing down costs of design, install, finance, etc).
2. Ramp (2012-2014)
- scale lease financing (ie., raising funds, etc)
- bring down customer acquisition costs (ie., acquiring Paramount Solar will help)
- automate via software (ie., internal processes, customer management and customer portals)
- ramp installation (ie., massive expansion of installation teams, acquisition of ZEP solar mounting, etc)
3. Ramp #2 (2015-2018)
- continue cost reduction efforts religiously on all fronts (customer acquisition/marketing, design, installation, equipment, maintenance, etc).
- continue to scale lease/PPA funding, maybe even crowdfunding (ie.,
SolarCitys acquisition of Common Assets points to a new investment strategy - Local: In The Peninsula )
- expand internationally
- reach 1 million customers
Also, this is speculation but I think within the next 1-2 years that SolarCity will get into their own inverters (either release their own or acquire an existing company). Lyndon Rive hinted during a recent conference call that they wouldn't do micro inverters but could do inverter(s) mounted at the side of the roof (my paraphrase). I envision SolarCity's new/future inverters to be possibly some kind of micro inverter (but maybe not as small as current micro inverters, so maybe "small" inverters) that are mounted to the side of the roof and can be easily expanded. For example, if SolarCity needed to add several more panels to an existing system, they could add one or two of their "small" inverters to the system to add more panels. Basically, these "small" inverters would work similarly to micro inverters but they wouldn't need one for each panel (maybe one for 5 panels or so) and they would be chained together so you could add as many panels as you want in the future. One of the current disadvantages of micro inverters is that when they fail it's a pain to replace (since their attached to a single panel on the roof). By installing their own "small" inverters on the side of the roof/house, it'll be easy for Solarcity to replace any failed inverters and they can add more inverters/panels as well. It's the best of both worlds.
Ironically, I don't think Solarcity will get into making their own solar panels. I think they'll be taking over every other part of the process (ie., marketing, design, installation, mounts, inverters, monitoring, etc) but I think they'll leave panels to other companies since I think panels are/will be a low-margin business and it's advantageous to have access from multiple/many suppliers.
4. Ramp #3 (2019-2025)
By expanding internationally, Solarcity will probably be able to expand to 5-10 million customers by 2025 or so. This is my speculation but it's based on me betting the SolarCity will have the lowest costs and will offer the best overall product (ie., ease of signup, monitoring, transfer, scaling battery storage, etc).
5. Ramp #4 (2026-2040)
This is when it gets really juicy with stationary storage becoming much more affordable. If SolarCity can continue their cost reduction efforts (ie., with the Musk ethos) and iterate religiously, then they will become increasingly dominant in residential and commercial installation. I can see SolarCity eventually have 50-100m customers by 2040 (ie., remember international expansion).
Another huge area of possible SolarCity profit expansion is into the home improvement arena. Since SolarCity is monitoring energy production and usage, they can recommend various home improvement items to make one’s house more energy-efficient. For example, new windows, insulation, tankless water heater, attic fan, HVAC, etc. Initially, SolarCity can make money off of referral fees but eventually I think this part of the business can be very large and thus SolarCity would probably want their own division installing and maintaining these items. Their main competition in this field is probably Nest (recently acquired by Google).
SCTY vs Chinese Solar
I know there’s a lot of folks here that are invested in Chinese solar. Here are some thoughts on SCTY vs Chinese solar. I like certain Chinese solar companies - most notably, CSIQ… and TSL and perhaps JKS. The most important factor I look at is management and how these companies are approaching their growth strategies. In my opinion, I think the panel business is limited since it’s very crowded and it’s somewhat of a low margin business. However, I like CSIQ, TSL and JKS not because they are solar panel manufacturers but rather because they are aggressively entering the utility-scale solar installation field. This utility-scale solar arena is much higher margin than panel production and there’s a huge future ahead for the companies that can deliver a strong product/offering in this field. So far, the Chinese companies like CSIQ, TSL and JKS have a lot of advantages in that they are integrating the complete panel/module manufacturing process and achieving some really amazing low costs. They can then leverage this to offer utility-scale installations are very attractive prices. To me, this is where the largest growth will happen with certain Chinese solar companies. In other words, I don’t think the panel business alone is sexy enough (ie., not high enough margin and is not growing fast enough) to justify high multiples when valuing these Chinese solar companies. However, when these companies are able to grow rapidly into utility-scale projects, I think margins will improve and the companies will look more attractive. They can continue to grow their panel business as well by building more plants and by acquiring other companies.
The Chinese solars have had a huge run in 2013 and have rallied from a place of being grossly undervalued to being maybe slightly under-valued (and certain companies being already fairly valued). Certain companies still probably have some way to go to become fairly valued but the majority of the huge run toward being fairly valued probably has already passed. (Note: I’m not saying companies like CSIQ’s stock won’t increase a lot, I’m just saying not as fast as in 2013. I can see CSIQ doubling or more from it’s current $25 price within a year, so I think companies like CSIQ are actually a very good near-mid term investment if you’re looking 1-3 years out. Actually, I recommend those wanting to invest in solar to check out CSIQ. I think they have the best management among non-SCTY solar stocks and their prospects look very good. Also, currently CSIQ is off 44% from it’s all-time high. I love buying great companies when they’ve fallen at least 40% from their ATHs. CSIQ, I think, can be a great enduring company and I’d choose it over TSL, JKS, SPWR, etc.).
So while I’m a big fan of CSIQ, I’m a even bigger fan of SCTY. In my opinion, SCTY has better management and they’ve got a better business model (at least with residential and commercial). Here’s how I look at… the solar industry is growing at a fast rate, but there’s limited profit to be made. By “limited” I don’t mean small but rather that companies need to have a good business model to extract profit out of areas of high value-add. In other words, even though solar is growing fast not all companies will make a lot of profit in the field. Rather, it’ll likely be a few big winners that take the majority of the profits in the solar industry. It’s easy for a company to release a product in an area of low value-add (ie., something that everyone else is already doing) but they’ll be faced with huge obstacles in extracting large profits. So, the key in the solar industry is for a company to analyze all the possible areas to extract profit from and to choose the areas that offer the highest value-add (ie., in other words, areas that other companies aren’t excelling at and there’s still a lot of margin to be made).
SolarCity, directed by the insight of Elon Musk, chose to go after not panels (or equipment) but after the rest of the solar system for residential and commercial. In other words, they saw solar panel manufacturing as an area where companies are already competing aggressively in and where margins where already low. Further, the bulk of the extraneous cost of a solar system lies in the other parts of the system - marketing/customer acquisition, design, permits, installation, etc. So, SolarCity decided to go after the non-panel (and non-inverter) parts of a solar system in hopes that they could go weed out the greatest existing inefficiencies in the system and thereby achieve the highest margins. One of their first/biggest problems to solve was the lack of funding available for house owners to install solar systems. Through their various funding vehicles SolarCity has managed to put together an impressive system to fund and lease solar systems, and they’re doing it better than anyone else in the business. Besides funding, SolarCity also has invested huge amounts of resources into developing their own systems to manage customer acquisition, internal process, design and permitting, installation, monitoring, etc. Further, with the acquisition of Zep Solar last year, SolarCity is now going into some of the hardware of the system (ie., mounts). I expect SolarCity to continue as I mentioned above to expand in this hardware area with inverters.
SolarCity’s value-add to the customer is they’re saying, “We’ll give you clean energy at the cheapest price with the most convenience.” This might sound all good, but it’s extremely difficult to do. It’s a very high-value add when you combine all the areas that need to be done right to achieve this end goal/result.
Now, some might disagree with SolarCity’s value-add proposition, and I can understand. If one purchases a system outright, typically it likely works out to be a better deal over the long-term. In my personal research, I’ve interviewed several local installers and I found they charge a very large markup for their services. I’ve looked into the possibility of just buying a solar system kit (ie., panels, inverter, mount, etc) and what it would take to do the design/permit process myself and have an installer just do the installation. But it turns out to be quite complicated and that’s why solar installers typically charge a very large markup.
Also, while some people have access to funding themselves (ie., cash, HELOC, etc) others aren’t so keen to take out a loan or to use cash that they might not have to outright purchase a solar system. Granted, if you have a lot of cash laying around purchasing a system makes a lot of sense.
Some people view SolarCity as mainly a financing company, but I disagree. Financing/leasing/PPA is one of the key aspects of the company, but the main ethos of the company is to drive down costs in all areas to offer the most appealing product possible to the customer.
Generally speaking (of course there could be exceptions), currently no other company does solar financing (on a large scale) better than SCTY. No other company does design, permitting, and installation more efficiently than SolarCity. And no other company offers a more convenient experience than SolarCity.
As SolarCity improves all areas of their business (financing, marketing/customer acquisition, design/permitting, installation, mounts, monitoring, offering other home improvement products, etc), their value-add proposition (We’ll give you clean energy at the cheapest price with the most convenience.”) will grow stronger and stronger. This will be the key impetus in driving their future growth to millions of customers (hopefully).
Risk Factors
Now there are important risk factors with SCTY. One can read their annual report and find a whole list of them. However, I think the key is the rate of customer acquisition. Let me explain.
In order to justify super high earning multiples in their valuation, SolarCity must exhibit very fast growth. It’s SolarCity’s growth that makes it a sexy stock (ie., hopes of world domination, etc). However, if their growth slows and, for example, they aren’t able to hit their 1 million customer goal by mid-2018 then the stock could get hit hard. (Note: SCTY's stock price is factoring in future growth several years out and will continue to go higher if growth continues at a rapid pace but will get hammered if growth slows/tapers more than expected.)
One of the key weaknesses in the SolarCity business model is the high customer acquisition costs. SolarCity doesn’t have a very viral product. Sure, there’s some word-of-mouth referral but the majority of new installations come from their aggressive marketing and customer acquisition campaigns. In Q3 of last year customer acquisition expenses worked out to be about $2000/customer (
SolarCity - Crisis or Opportunity? | Alternative Energy Stocks). One of the reasons, SolarCity spends this much money to acquire a customer is because IMO SolarCity’s offerings aren’t super sexy. In other words, if they were super sexy (ie., super cheap, etc) then customers would be raving about them and evangelizing all their friends. However, since this isn’t the case, SolarCity needs to spend money to acquire customers and it’s not cheap.
One of the reasons SolarCity’s offering isn’t viral is because it’s a very mundane product and proposition (ie., save some money on your energy bill). It also largely depends how much a person will save by switching to SolarCity from their current energy provider. If everyone could save 40% of their energy bill by switching, then SolarCity probably wouldn’t need to spend anything on customer acquisition because people would be flooding their phone lines. However, when/if SolarCity only saves them 10-15% of their energy bill, then it becomes much more of a hassle to switch to SolarCity (because of the perceived unknowns of a solar) and thus SolarCity needs to spend a lot of money to educate and persuade.
So, can SolarCity keep driving down costs and pass it along to its new customers to make their offering more and more attractive over time (thus making the product more viral and driving down customer acquisition costs? I think they can but it will be challenging.
Also, owning a solar system is inherently more sexy than leasing a solar system, especially as long as there’s net metering (ie., California passed a regulation where people can keep net metering for 20 years as long as they install their systems by mid-2017,
California says current solar owners can cash in off their excess power for 20 years | 89.3 KPCC). If someone (or some company) can figure out a way to allow people to own their own solar systems in net-metering friendly states and to do so with easy/competitive financing, then this could be very appealing (and could become viral). I’ve thought about this quite a bit and it’s quite a big challenge. There are certain cities/counties where attractive funding/financing for solar already exists. In those areas, I think companies could provide a path to solar ownership for customers that might be more appealing than what SolarCity can offer. But in the majority of cities, there needs to be some very aggressive way to lower costs of design/permitting/installation. One can already buy a solar system kit (panels, inverter, mounts) for fairly inexpensive. If there can be a way where people can crowdsource (or open source) the design/permitting process and even open up installation to a super efficient bidding system, then it might be possible to drive down these design/permitting/installation costs to make it much more affordable to install a solar system. In other words, I think SolarCity could be at risk but something revolutionary and scalable needs to be created to make affordable solar ownership a reality. To me, this is probably the biggest risk as a SCTY investor.
Early on in the thread sleepyhead was making a point that owning solar is better (ie., more appealing) than leasing. I think he was trying to address this risk factor for SolarCity, meaning if there’s a cost-competitive way to own solar than it’s more appealing to the end customer than leasing. I think this is a valid point. For someone to have a fully-paid off solar system is very appealing, especially if they’ve got net metering for the next 20 years guaranteed (ie., in California). In 20 years, stationary storage will be much more affordable and as long as someone has the money they can go completely off the grid with a large enough stationary storage unit. Now, that’s sexy.
The reality though is that most people will probably not be owning their own system but rather be buying energy in a similar manner as they do now, except the new utility will be SolarCity and the energy will be clean and cheaper. But again, if there was an easy and scalable way to own solar for the average Joe who has very little in his bank account, then yes that is a risk factor for SolarCity’s business model. I don’t think it ruins SolarCity completely (as there will probably always be a sizable leasing/PPA market, but it sure will put a damper on things). I think the risk is low to moderate since there’s a capital cost to be paid for a solar system and that cost needs to be paid over time, and that financing usually doesn’t come for cheap, meaning there’s an interest rate and cost to be had. So, if someone doesn’t have cash up front, then they’re going to be paying monthly payments and that’s an arena that SolarCity plays well in.
In the event where there’s a disruptive, revolutionary business model where it allows people to own their solar system via affordable monthly payments, then SolarCity could adjust it’s model to compete. However, where it gets tricky is if the disruptive/revolutionary model is so disruptive that it uses crowdsourcing/open-source/transparent-bidding to make the design/permitting/installation process much cheaper. In other words, a new disruptive model could basically suck the majority of the profit out of the design/permit/installation process (ie., opensource/crowdsource the design and permitting process and have a transparent bidding system for installation) then there might not be much profit to be made for companies like SolarCity. I think the likelihood of this happening in such a manner that it displaces SolarCity is low but it’s something that should be acknowledged and considered.
SCTY at $53.70
So, I’ve shared some pros and cons of SCTY as stock and company and I’ll end with some final words on the stock price. SCTY closed at $53.70 last Friday, down 39% from it’s all-time high of $88.35. While I don’t have time to share about a valuation model for SCTY in this post (I might do it later), I can say that I like buying stellar companies when they’re on the operating table (Warren Buffett quote). Who knows how far SCTY will drop with the current market correction happening but at these levels (especially at almost 40% from the ATHs), I think if you’re a big Elon Musk fan and you don’t own any SCTY, then I’d say it’s a decent time to get in and buy some SCTY shares. Sure, it could go lower (ie., $50 or even $45 but chances are fairly low it dips under $45 IMO) but then again it could recover as well. Nobody really knows. But in the long-term, I like having a position in SCTY because Elon Musk is chairman of the board and largest shareholder. He inspires the companies with his values and the Musk Ethos has brought SolarCity this far and it will likely lead it to much better places ahead.
- - - Updated - - -
For reference, here's some old posts I wrote on SCTY from several months ago. Some of it might be outdated since SCTY has released better info since but it gives some more background on my thoughts with SCTY.
Understanding SolarCity (8/13/13) -
Alternative Energy Investor Discussions (formerly SCTY thread) - Page 74
More thoughts on SolarCity (8/18/13) -
Alternative Energy Investor Discussions (formerly SCTY thread) - Page 76
SCTY’s focus to drive down costs (11/6/13) -
Alternative Energy Investor Discussions (formerly SCTY thread) - Page 208
