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SolarCity: A Good Investment or Hype?

March 17, 2014 | About:
vinaysingh

Vinay Singh

5 followers

Renewable energy has grown considerably in the last few years and it's certain that it will triumph over fossil fuels as the primary fuel of the future. Since 2007, energy generation from coal has dropped nearly 25% from 2.02 billion MW-hrs to 1.51 billion MW-hrs in 2012. This doesn't incorporate any solar installations in 2013 which has been a prolific year for solar. As per the latest statistics, solar energy only accounts for approximately 0.2% of the total energy consumed in the United States; however it is expected to grow considerably in the coming years.

Residential solar grew significantly in 2013 due to companies like SolarCity (SCTY) and SunPower (SPWR), which offer $0 down leases and increasingly competitive sale prices. SolarCity appreciated over 400% in 2013 and while many are skeptical about its valuation, I think it will continue to rise in the future. Let's take a look at the reasons which I think will drive SolarCity higher.

Rooftop Trend

Currently, the rooftop solar sector is on the rise and this trend should continue in 2014. Goldman Sachs has projected that the rooftop sector will grow at a CAGR of 45% till 2016. Big name retailers, such as Wal-Mart (WMT) and Costco (COST), are aggressively adopting rooftop solar. These retailers have the scale and access to low cost financing to make rooftop solar economics work. Hence, rooftop solar should continue to grow as solar energy achieves grid parity in more places and more companies, which will ultimately benefit SolarCity.

Reducing Price

Due to the massive supply of polysilicon, the price of solar technology has come down considerably. Currently, the utility scale PV has come down to $2,000 per KW of capacity from $3,250 in 2010 and most solar market research firms project that the costs will keep climbing down in the coming years.

In addition, efforts are being made to bring down the soft costs, such as labor and systems design, of solar, which currently make up anywhere between 52% and 64% of total installation costs. These soft costs are the primary reason why the solar technology in the U.S. is considerably more expensive than in Germany. In addition to falling soft costs, solar panel prices are also estimated to fall as solar cells become more efficient, and manufacturers realize greater economies of scale. So, one can expect the prices to drop considerably in the foreseeable future.

In fact, solar has already become cost competitive. As per Deutsche Bank, the levelized cost of energy for solar is projected to be $0.11 to $0.15 per kilowatt hour, compared with $0.11 to $0.37 kilowatt hour for retail electricity, for states likes New Jersey, New York, Connecticut and Vermont. Deutsche says that presently, solar is competitive without subsidies in at least 19 markets globally and it expects more markets to reach grid parity in 2014 as solar system prices decline further.

Residential Segment Will Drive Growth

Non-residential solar is expected to drive SolarCity's growth, but it was the residential segment which contributed the most to the company's success. Solarcity dominated this segment and had four times the market share of its closest rival, Vivint.

Unique sales ventures with Honda (HMC), Viridian Energy, and Home Depot (HD) helped to boost its market share, attracting a new base of customers, noted solar analyst Nicole Litvak. SolarCity already commands 32% market share in this segment and the reducing prices should help it to perform even better. The company expects to double installations to 475MW - 525MW in 2014.

Third-Party Ownership

Instead of manufacturing solar cells, SolarCity acquires them from different suppliers. The company has been acquiring firms to reduce both customer acquisition cost and PV installations. In addition, this restricts the risk of reducing silicon prices which have had a big negative impact on the U.S.A. based solar companies in the recent past.

Conclusion

SolarCity's valuation may be ahead of its fundamentals, but solar energy is expected to grow a great deal in the coming years and being the market leader, SolarCity is poised to benefit the most from the solar revolution. Going forward, I expect the increase in demand of solar energy, boosted by cost reduction, to enhance SolarCity's margins. Therefore, I think SolarCity is a good buy despite of its inflated valuation.


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