SolarCity (SCTY, Financial) is the largest U.S. rooftop solar installer and is expanding its footprint aggressively in the domestic market. The business model of the company thrives on contracted payments for leased/PPA systems and tax incentives.
Declining prices of solar panels and improving efficiency makes such a business model viable. However, the biggest worry has been that the company hasn’t posted any profits during the past two and a half years, and the stock has been trading sideways for the larger part of two years. First-quarter fiscal 2015 was yet another loss-making quarter.Â
First-quarter numbers
SolarCity’s revenues grew 6% year-over-year to $67.5 million, beating the Street’s consensus by over 16%. The growth was due to growth in operating leases and solar energy systems incentives. The company’s total deployment grew a whopping 74.4% year-over-year to 143 MW.
Gross profit during the last reported quarter also grew 47.3% year-over-year to $21.8 million. The rooftop solar installer is channeling most of its funds to solar installations before the solar-tax credit cut comes in 2017. As a result, the company reported net adjusted loss of $1.52 per share versus a loss of $0.82 per share in the prior-year quarter. Analysts had expected loss of $1.60 per share.
SolarCity exited the quarter with cash and cash equivalents of $446.7 million, and long-term debt of $467.7 million.
Roof-top installation to drive growth
During the quarter, SolarCity booked a record-breaking 237 MW and installed 153 MW. The residential roof-top business grew a whopping 108% year-over-year, and the company now has 217,000 customers. It plans to have 1 million customers by mid-2018, and this looks possible. The company has been growing customers at a rate of 95% year-over-year, whereas it just needs to achieve 60% year-on-year growth to reach the 1 million mark.
The contract value increased $1.2 billion during the quarter, taking the total to $6.1 billion. This was 1445% higher than the prior-year quarter.
International growth plans
Currently, SolarCity’s major operations are in the domestic market. The domestic market has huge growth potential, and SolarCity feels that the company can keep growing for next 10 years. Currently the market that it serves covers just about half the U.S. population. The declining cost of panels and increase in efficiency has increased the total addressable market to roughly $60 billion in the U.S. alone.
CEO Lyndon Rive said during conference call:
“I’ve said the statement a few time, we have been thinking about expanding internationally in the next year for the last eight years. And so we’ll probably expand internationally in the next year or two.”
Expansion in the international market will diversify SolarCity’s portfolio and offer an enormous potential for additional growth in the long run.
Looking at battery market potential
The company announced new versions our solar battery systems in all its business units – commercial and government, residential, and microgrid. SolarCity is seeing high demand and significant growth in the commercial and microgrid offerings.
In the residential systems offering, the battery costs have declined to one-third of what they were a year ago. These are expected to fall further over the next decade, making battery deployment by default a viable proposition. The company is looking at the backup generators market that has grown at CAGR of 12% over the last decade. In fact, the residential backup generator market is larger than the solar market, and this should be a growth driver in the long run.
Short-term outlook
For the second-quarter fiscal 2015, SolarCity expects year-over-year revenue growth in the range of 42% to 50% and clock anywhere between $86 million to $92 million. The company expects the installation to grow 69% year-over-year to about 180 MW, with the residential segment growing 80%.
Wrapping up
SolarCity’s domestic addressable market is very large. Declining costs of solar systems is going to increase the addressable market further. SolarCity has barely scratched the total addressable market of $60 billion.
Also, the gross margin is growing at a good rate during the last three years. The company is rapidly increasing its footprint in the residential segment, where it is an undisputed market leader. The company’s cost per watt during the quarter declined 9% to $2.95, and aims to achieve $2.50 per watt by 2017.
In the long term, batteries and the international market will be other growth drivers. Therefore, this stock is a good buy.
