America’s solar energy industry has been growing at a rapid clip and currently employs more than tech giants Apple (AAPL), Google (GOOG), Facebook (FB) and Twitter (TWTR) combined. Solar power accounted for one-third of nation’s new generating capacity in 2014, outpacing both wind-energy and coal for the second consecutive year in a row. The nation now has 20 gigawatts (GW) of installed solar capacity – enough to power 4 million U.S. homes.
In the year 2014, each of the three major U.S. market segments – utility, residential and commercial – installed more than 1 GW of solar power capacity. Rooftop solar power is increasing at a brisk pace. The rooftop solar potential in the U.S. is as shown below:
SolarCity (SCTY, Financial) is king of rooftop solar installations market in the U.S. The solar installer posted first-quarter 2015 results earlier this month. Let’s take a look at the underlying business and what it holds for investors, going forward.
Quarter at a glance
SolarCity posted total revenues of $67.5 million, beating the analysts’ expectation by a handsome margin of 16.4%. This signified 6% year-over-year growth on the back of increased operating leases and solar energy systems incentives. The total deployment during the quarter was 143 MW, representing year-over-year growth of 74.4%, and taking the total installed capacity to 1,212 MW as of Mar 31, 2015.
The company booked 237 MW during the quarter, signifying 74% jump year-over-year, with 60% year-over-year gains in residential segment. The solar installer added 27,938 customers to its portfolio during the quarter, bringing the total customer count to 217,595 as of Mar 31, 2015
SolarCity seems to be aggressively pumping most of its revenue into solar installations ahead of the solar-ax credit cut expected in 2017. Hence, growing expenses have taken a toll on earnings this quarter. The company posted better-than-expected loss of $1.52 per share. Analysts had pegged this at $1.60 per share. In the comparable quarter in the year-ago period, the loss was $0.82 per share.
Looking ahead
The residential backup generator market is larger than solar with over 3.5% of residential customers having backup generators. The industry leader in this segment clocked over $1 billion revenues last year and had seen a CAGR of around 12% over the past 10 years. SolarCity announced a new version of solar battery systems for commercial and government, microgrid and residential segments. The commercial and microgrid segments are showing great demand for the new battery and going forward this would be a growth driver.
In the residential segment, the cost of batteries has declined to one-third of what they were a year ago. The declining trend is expected to continue for next five to ten years, thereby making it feasible to deploy the battery by default with all solar power systems. A solar battery backup system will sell for $5,000 as an add-on to a leases and PPAs. This will be a good growth driver going forward as it will eat into market share of backup generators.
The residential business grew at a whopping 108% year-over-year. The company has a goal of 1 million customers by the end of 2018 and looking at historical growth rate, this doesn’t seem a farfetched number. To achieve this figure SolarCity’s residential customers need to grow at a clip of 60% versus the actual average of 95% that it has been clocking.
Productivity increase is another driver that will ramp up the bottom line. For example, using its using our Zep mounting hardware, the solar installer installed 157 kilowatt large commercial flat roof in three days versus an industry standard of over 20 days
For the second quarter, SolarCity expects installations growth of about 69% to 180 MW, with residential account for 80%. For the full fiscal year, the total installation is expected to increase 100% year-over-year to 920–1,000 MW.
On the back of installations growth and operational efficiency increase, the revenues in second quarter are expected to jump 42% to 50% year-over-year and net loss per share is expected to be in the range of $1.60–$1.70.
Final words
The 30% tax credit for solar systems on residential and commercial properties is expected to drop to 10% in 2017. SolarCity is aggressively trying to gain as many customers as possible before the cut. For the short term, SolarCity will be under pressure, but things will improve over long-term.
The company has brought down the cost per watt by 9% year over year to $2.95 during the quarter, and plans to hit the $2.50 mark by 2017. The company is doing everything possible to gain market share – MyPower solar loan, partnership with DIRECTV and collaboration with MP2 Energy being few such initiatives.
However, the worry some factor is that it hasn’t posted profit for the last ten quarters and its operating expenses have jumped up significantly. It also faces competition from peers like SunPower (SPWR, Financial) and Vivint Solar (VSLR, Financial). Those who are looking at a long-term investment for growth can open a position, and others can stay on the sidelines for a few quarters more. It is definitely not a stock for near- or medium-term gains.
