If this method of operations turns out successful, this will be a bonanza for both companies. If, on the other hand, this business method proves futile, there’s more than a probable chance that other players, like First Solar, Inc. (NASDAQ:FSLR), will reign.
Business model
SolarCity Corp (NASDAQ:SCTY) provides renewable electricity directly to homeowners, businesses, and governments by offering solar power to consumers at prices lower than typical utility costs. In a sense, it’s a specialized financier. The company leases solar panels to homeowners on a 20-year contract, with no up-front cost to its customers. By doing so, SolarCity guarantees a predictable stream of lease payments.
It’s a great business model. It appeals to homeowners because there aren’t any up-front payments, and it appeals to the company because once a panel is installed — all that SolarCity Corp (NASDAQ:SCTY) has to do is collect its monthly interest paychecks. In a way, Tesla Motors Inc (NASDAQ:TSLA) operates in a very similar business model. It sells its highly expensive cars by offering customers extremely generous payment terms — a low first down-payment, to be followed by months (usually 36 months) of ongoing payments of principal and interest.
Offering generous financing is great for attracting first-time customers, but it’s also very risky. Troubles begin to mount once customers refuse or unable to keep up with payments. In SolarCity Corp (NASDAQ:SCTY)’s case, the company will incur the costs of installation and removal of panels.
In Tesla Motors Inc (NASDAQ:TSLA)’s case, the company will keep some of the payments and receive a used car instead of the brand new car it gave the customer in the first place. In contrast to these two companies, First Solar, Inc. (NASDAQ:FSLR) engages in a much safer practice. It actually generates power from solar resources, packs it, and sells it to third parties. There’s no inherent financing model involved.
Heavy subsidies
Both companies rely heavily on government subsidies because normally, renewable energy initiatives can’t stand on their feet without the government giving them a hand. That’s fair and legitimate. But Elon Musk has definitely taken this to the next level. A look at the Department of Treasury Section 1603 data shows that SolarCity Corp (NASDAQ:SCTY) received 27 awards across 15 states amounting to $95.6 million in cash from a long-standing tax credit for renewable-energy investment turned into a direct grant in the stimulus bill.
SolarCity has recently applied for an additional $325 million in these stimulus grants, according to the SEC filing. And it seems that not only the government is in love with SolarCity Corp (NASDAQ:SCTY), investment bankers are too. Although the company is still losing money, it isn’t finding any difficulties in raising capital for expansion. In mid-May, the company inked a new $500 million round of financing from Goldman Sachs, which will enable it to install 110 megawatts of additional power on residential homes.
And Tesla Motors Inc (NASDAQ:TSLA) is leaving SolarCity in the dust. Since inception, Tesla has received a total of $456 million as a federal loan. That’s a staggering subsidy granted to one single company. In favor of Tesla Motors Inc (NASDAQ:TSLA), I must add that the company recently paid off its loan in full, nine years early, thanks to a round of share issuance. But it doesn’t mean that Tesla won’t need another government loan in the future.
In fact, with its current cash burning rate (from operations alone) of $266 million a year, another request for subsidy might be just around the corner. This means that if subsidies cease, for whatever reason, operations will come to a halt.
In contrast to SolarCity and Tesla Motors Inc (NASDAQ:TSLA), First Solar, Inc. (NASDAQ:FSLR), earlier in the year, unveiled a long-term strategy of building solar power plants in developing regions where it could profit without subsidies. I believe the key to future success is to rely less, not more, on government subsidies. And that’s exactly what First Solar is doing.
Exuberant valuation
Although SolarCity’s revenue has grown handsomely, from $32 million in 2010 to $128 million in 2012, losses have outpaced this revenue growth. The bottom line shows that SolarCity’s net loss in 2012 was $64 million, up from a net loss of $38 million. And for this wonderful stream of losses, the public is willing pay 24 times sales and 17 times book value. To call SolarCty’s valuation “overly- extended” is the understatement of the year.
And Tesla is exhibiting a similar trend. In 2012, losses stood at $396 million, up from $154 million in 2010. Despite these losses, investors are willing to pay a price-to-earnings multiple of 144x, which equates to 15 times sales.
Contrast that to First Solar, which has seen its revenue nearly triple over the past five years as the company continues to cement its status as the industry’s leader. Still, despite its status as the clear leader in solar, the company sports a P/E of less than 10x, with a price-to-sales of only 1.1x.
Looking forward
The clean energy industry relies on both end-customers and the government alike. I believe that current valuations for SolarCity Corp (NASDAQ:SCTY) and Tesla Motors Inc (NASDAQ:TSLA) warrant a special warning, especially considering their mounting losses, dependency on government, and risky business model. Invest accordingly.
The article SolarCity Is Just Another Form of Tesla originally appeared on Fool.com and is written by Shmulik Karpf.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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