I will not invest in a high-tech, complicated business based on the prospect of massive growth. While it works for many investors, including some top Fools, I prefer boring and predictable businesses all day. So, it may seem odd that I would support a solar business. But this one is a simple, cash-generating machine that directly benefits from the long-term trends of solar adoption, without the risk of short-term demand fluctuations. While it’s a technologically complicated and disruptive company, SolarCity Corp (NASDAQ:SCTY) has a very simple model, with cash flow streams that are easy to forecast. For many customers, the installation and panels cost nothing up front. SolarCity then owns the energy, and leases it back to the customer, sometimes with a contract that locks in prices for the customer. By most studies, this is a very efficient means of paying for utilities, and allows for the customers, investors, and company to produce strong ROIs.
In the company’s recent conference call, CEO Lyndon Rive confidently stated, “We are clearly on our way to building the most compelling energy company in the 21st century.” Now, CEOs can often be boastful and overshoot the importance of their mission; but this is one time where I am inclined to agree with the chief executive. Much like the resource it exploits, SolarCity has found a way to run a constant, reliable energy company whose long-term benefits far outweigh the short-term trends.
Looking forward
The company recently recapitalized some of its debt at much more favorable rates, and it only makes sense. As the company’s CFO mentioned in the conference call, “What we’re financing with these assets are 20-year contractual cash flows. It’s a very high quality predictable cash recurring and with the low operating cost structure. When you bring that asset to the marketplace it will achieve a very attractive cost of capital.”
Not to abuse the point, but many solar companies face the immense hurdle of tremendous up-front costs, with volatile, unpredictable returns. This is why companies like First Solar and Suntech have gone from market darlings to pariahs.
SolarCity Corp (NASDAQ:SCTY) management expects 250 MW in total deployment for 2013. With 195 MW in backlog from the prior year (not all to be realized in 2013, but the point still stands), and consistent customer growth every quarter, I believe the company will have no problem meeting, and surpassing, that 250 MW target.
For investors compelled by the long-term solar trends, which are still very encouraging, this is your play. SolarCity may be the most risk-averse, simple solar business available today.
The article 1 Solar Company That Is Out of This World originally appeared on Fool.com.
Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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