Solar Industry Prospects Make This Stock a Good Investment

SolarCity Corp. (SCTY, Financial) is in tune with a projected 900 megawatt (MW) to 1 gigawatt (GW) installation in the U.S. in both residential and commercial deployment of solar by the end of 2015. The company has reiterated that it could even touch 2 GW by the end of 2015, with a historical growth rate of 98% for the last five years if the set target is met.

Certainly, the pace at which the industry is growing, potential outlook it offers, and surging demand for its photovoltaic system outrights is supported by the working group created by National Renewable Energy Laboratory at the U.S. Department of Energy. This group is aimed at examining and bringing down barriers to lending in the residential rooftop solar sector. This group also assists in making it easier for homeowners to borrow money for purchasing photovoltaic system outrights, thus creating enough market for the company.

Making good progress

In a seasonally weak quarter that has relatively less sales compared to that of the winter holiday season, SolarCity deployed 82 MW in the quarter and met the top end of its guidance. It deployed approximately 67 MW as compared to 30 MW deployments in the quarter a year earlier, an increase of 123% in residential deployment of solar. It also had nearly 50 MW in commercial deployments.

As a result, SolarCity's revenue for the quarter increased 155.6% to $63.5 million year over year. But its net loss continues to worry investors as it posted a net loss of $24.1 million or earnings of $0.26 per share, up from a net loss of $40.9 or earnings of $0.54 per share last year. However, it topped analysts' estimation on both the top and bottom line as analysts had been modeling earnings of $0.70 per share on revenue of $53.3 million for the quarter.

Due to high operating expenses of $81.8 million that exceeded earlier guidance of $70-75 million owing to accelerated ramps in sales headcounts throughout the quarter and higher than estimated stock compensation expense had impacted its earning considerably.

Looking at the numbers precisely, SolarCity is consistently doing well over the past two years as its net loss has narrowed significantly to 107.69% in a seasonally affected quarter after a successful winter holiday season. It promises to turn a profit in the coming years as it forecasts its revenue guidance for 2014. Its operating lease revenue is expected in the range of $39 million to $43 million. Its operating lease margin would be between 50% and 55% of the revenue. The CapEx will be in the range of $100 million to $110 million for the year.

Investments to note

SolarCity is making a concrete investment in Sales and Marketing team as it is determined to deploy over 200 MW till the end of the quarter. The company will certainly benefit from the bookings that total to 136 MW, up 34%. It has exceeded $750 million in financing, and has entered into new $250 million facility by Bank of America/Merrill Lynch, which definitely tells us that the company is engaged in various initiatives that will produce better results in the coming years.

The number of energy contracts has increased significantly; the company now has a total of 80,000 energy contracts and $2 billion of cash contracts at its fold. SolarCity added $900 million contracts in the year and a total of $1.1 billion cash contracts in 2012. With these numbers rising on a regular basis, SolarCity expects to yield a higher market share in the industry.

SolarCity has reduced its cost of installation drastically with various cost saving initiatives, such as opening a centralized account management in Las Vegas, and 10 new operation centers across the region in the fourth quarter. The company has thus increased its operation centers 50% to 46. Nevada becomes the 15th state in SolarCity's service area, which will give ample opportunity for the company to establish its residential and commercial deployment of MW and deliver better margin for 2014.

In addition, SolarCity has fully allocated its cost to approximately 30% with improvement in operational efficiency, improvisation of processes such as hardware for both residential & commercial and offices, and economics of scales such as reduction in cost of battery. SolarCity has recently experienced reduction in variable costs in terms of installation while fixed cost remaining flat in spite of increasing volumes. This is certainly good news for the company as it will categorically fetch better operational results for the company.

SolarCity continues to invest in technology and services to differentiate it and create a competitive edge over its peers such as Real Goods Solar Inc. (RGSE), AEE Solar Inc. and Rec Solar Inc., and create value proposition for its customers across the world. SolarCity has recently announced a new COO, Tanguy Serra, to bring much needed innovation in the technology component of the business.

SolarCity recently acquired Zep Solar Inc. for $158 million and also has acquired direct marketer Paramount Energy Solutions LLC for $120 million. With these acquisitions in place, the company will certainly fetch better operational and financial results in the current fiscal year 2014.

Additionally, SolarCity is focused on grid integration and storage, looking a step ahead for the future as adoption of solar power is increasing worldwide, and the company develops a strategic approach to penetrate in the market. Moves like these will keep them ahead of their peers and increase its market share eventually. On the back of it, the company is heavily investing in the sales and marketing team to grow bookings in residential and commercial grounds, and the company has seen that its sales are in an upward move since last quarter.

Conclusion

SolarCity looks like a good investment for the long run, and since the company can benefit from the solar market, investors should consider investing in it.