Solarcity pay for power not panels

Solarcity (SCTY) provides customers with a cleaner and more affordable alternative to their utility bill through the use of solar power. What makes SCTY different is that customers have the option of buying their own solar panel system upfront or they can lease panels like in a normal electricity agreement. The majority 52% of sales are sold as solar as a service similar to paying a utility, consumers pay for power and not panels. SCTY enters into long term 20 year contracts with consumers and finances the panel for the consumer. SCTY makes money by pocketing the long term value of the contracts minus the upfront cost of the panel. Customers benefit by saving up to 15% of their electricity bill while being more environmentally friendly and avoiding the near $20,000 upfront cost of solar panels.

I see the light
The solar power system will be interconnected to the local utility grid so that you won’t experience any power interruptions. Most of the parts such as solar panels, carry manufacturer's warranties of 25 years; other parts, such as inverters, carry 10-year warranties. In addition, SolarCity offers 20 year warranties including monitoring and repair service. If you generate more solar power than you require you get a credit for your bill. The interesting thing about solar is that it generates it power when utility rates are at their highest.

As can be seen in the slide above rooftop solar provides 0.1% of the electricity today. The Department of Energy has estimated that it could contribute 3.5% of US electricity by 2030. SCTY is dominant in the space with around 26% share of installations and an installed base of 0.5 GW with 75,000 customers. It is a long range target out to 2018 but they expect to have 1 million customers and 6GW of capacity by that time. SCTY believe their addressable market to be 41 million homes.

Risks
Rising interest rates play a massive part in any valuation. Due to the fact that the panels are funded upfront while SCTY receives payments over a 20 year annuity stream.  Another risk is tax credits which are scheduled to reduce from 30% to 10% by 2017. Offsetting some of this risk is the likelihood that the price of panels should reduce over time.

Disrupting utilites
The majority of competitors are private the industry is fragmented with most of the work done by local installers like plumbers and landscaping businesses. At the end of the day solar is a scale and financing business, being listed allows SCTY to have a financing advantage over competitors. Utilities themselves are potential competitors if they enter the roof top market. The great part about SCTY's model is that it bypasses the distribution system of utility providers giving users a choice of provider. SCTY can create energy at the place it is needed instead of a centralized monopoly (utility) that is miles away.

Elon Musk not just electric cars
The CEO and CTO are the cousins of Elon Musk who is chairman and a significant shareholder at 25% with total insider ownership at 33%. Elon Musk if you don't know is one of the great entrepreneurs, a co-founder of Paypal, Tesla and Space X a rocket company that produced the first privately developed liquid fueled rocket to reach orbit. As with everything Elon does SCTY is a company that has the opportunity to disrupt a large market.

While difficult to value SCTY has the potential to be the most compelling energy company of the future.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has no long position in Solarcity (SCTY) stock 

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.