Solar energy is a fast growing market and being the leader, SolarCity (SCTY, Financial) is well placed to benefit from this boom. Solar market has a bright future as the installation and production costs of solar panels are consistently reducing. Solar costs are expected to become more competitive in the future, as a result of which the demand for solar panels –Â commercial as well as residential –Â is on the rise. I believe SolarCity should profit the most from this trend and is a great buy for the long term.
Commercial Solar on the rise
According to GTM Research, the usual cost of a residential solar system in the fourth quarter of FY 2014 was $3.48 per watt, whereas a commercial system cost just $2.25 per watt. Many companies have started using solar panels to cut cost as a result of which, commercial solar market is booming.
Apple (AAPL, Financial) is chasing a few prospects at the same time. It holds its own solar plants, built by SunPower (SPWR, Financial), and also has its own fuel cell farm near its data center in North Carolina. It's also purchasing power from a First Solar (FSLR, Financial) solar farm in California, by means of a virtual net metering structure to get its power.
Companies like Walmart (WMT, Financial) and Kohl's (KSS, Financial) are setting solar on their rooftops, along with hundreds of other businesses. They're fascinated in saving money and having more control over their energy needs. The commercial as well as residential solar market is growing at a fast rate and SolarCity stands to benefit from it.
Innovations will drive growth
SolarCity has fundamentally been the sole driving force for advancement and innovation in the residential solar sector, which is not shocking given the resume the company's management team. The company consists of long-term popular solar products such as rooftop leases, PPAs and most recently loans.
On the other hand, SolarCity has introduced many innovative products such as solar bonds, and has expressively smoothed out the residential solar financing process. The company’s existing dominance of residential solar is evidently not just a result of its first-mover benefit, but much more a result of the company's innovativeness.
None of the other residential solar company, as compared to SolarCity, has even shown a glimpse of SolarCity's innovation proficiencies, as most residential solar companies have been copying SolarCity's business model up until at present.
Innovation will likely carry on to be a key differentiator moving onward given how early-stage the residential solar business is, which clearly means that SolarCity should have a noteworthy competitive advantage for the predictable future. The company’s innovation momentum, like the market share momentum, has not slowed down either. In fact, SolarCity's innovation has arguably speeded up in recent months/quarters, with the announcement of programs such as Solar Ambassador, or the making of the apps such as MySolarCity.
New aggregation facility is a plus
SolarCity stated that it has closed a $500 million financing aggregation facility with Bank of America (BAC) Merrill Lynch, Credit Suisse (CS) and Deutsche Bank (DB). The loan facility is highly likely to be the major of its kind for distributed generation solar projects and once organized will finance more than 500 MW of solar power systems for government, businesses and homeowners organizations.
The facility will be fortified by a range of high quality, long-term client systems and agreements. Through a novel structure, the financing will permit SolarCity to fund client installations at a prior stage in their growth cycle, aiding a rapid return of working capital to support the faster growth in SolarCity's projected installations. When fully drawn, the company will be able to finance installations for tens of thousands of homes and businesses all through the United States. The clean energy delivered by these systems will balance carbon dioxide emissions over the lifetime of the systems.
The revolving loan will allow fully developed systems to be unceasingly refinanced through ongoing securitizations or other capital markets solutions, further driving down the price of a new system to government, commercial and residential clients, though providing loyal capital for SolarCity to finance the design and setting up of new systems.
Conclusion
As I’ve mentioned above, the solar market is on the rise. This upwards trajectory is expected to continue as solar costs are becoming more competitive. Innovation is SolarCity’s key strength and the company has used it to ensure that it makes the most of this growth. So, in my opinion, long-term investors should definitely buy SolarCity at present the valuation.
