Just a few days ago, I noticed my friend had installed solar panels on the roof of his house. When I asked him why, he pointed out his neighbor had installed solar panels just a few weeks ago. Apparently not one to be upstaged, my friend had proceeded to install solar panels as well.
I pressed on about the solar panels. How many years would it take him to recoup his initial investment in the solar panels?
He responded with a grin. Zero.
There was no upfront cost of solar panel installation and he paid less per month for solar energy than he previously did for electricity.
Petty neighborhood rivalries aside, this is an amazing value proposition from SolarCity Corp (NASDAQ:SCTY), the company that installed my friend’s solar panels. Through its growing economies of scale, SolarCity has created an alternative to conventional power that is not only more environmentally friendly but is also less expensive. It’s like getting paid to help the environment!
SolarCity Corp (NASDAQ:SCTY)’s business model is largely unique in the solar industry: it offers its customers the option of either purchasing solar energy systems or buying the energy the systems generate for the property. The latter of the two options is the key to SolarCity’s growth and is preferred by the majority of SolarCity’s customers. The average length of the energy purchase agreements is 20 years and throughout this time period, SolarCity makes additional revenue from energy efficiency evaluations/services and recommendations of third-party vendors (which in turn pay SolarCity referral fees). Approximately 48% of SolarCity’s new residential solar energy system customers in 2012 purchased additional energy products or services from SolarCity Corp (NASDAQ:SCTY), an encouraging sign of customer receptiveness.
SolarCity’s strategy also helps shield it from the huge seismic shifts that have hit the solar industry recently. Due to cutthroat undercutting from Chinese solar panel companies and a general saturation of the solar panel marketplace, many solar companies have crumpled and gone bankrupt. Small panel manufacturers have been practically decimated and even industry giants such as LDK Solar Co., Ltd (NYSE:LDK) and Suntech Power Holdings Co., Ltd. (NYSE:STP) have seen their market caps and profits plunge dramatically.
Some of SolarCity Corp (NASDAQ:SCTY)’s industry peers, such as First Solar, Inc. (NASDAQ:FSLR), are recovering from the huge solar shock by differentiating themselves through technological improvements. First Solar, Inc. (NASDAQ:FSLR)’s panels utilize a unique thin cadmium-telluride film design in place of traditional silicone and the company recently reported a 52% year-over-year revenue increase last quarter.
However, the solar panel manufacturing industry remains volatile and SolarCity’s business of offering mainly energy services instead of manufacturing solar panels gives it a much-needed industry resilience. Moreover, the low pricing of solar panels actually benefits SolarCity, which buys Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) and Trina Solar Limited (ADR) (NYSE:TSL) modules.
SolarCity Corp (NASDAQ:SCTY)’s business model appears to be working. In the first quarter of 2013, SolarCity grew its customer base 106% year-over-year and increased revenues by 21% year-over-year. Moreover, it recently expanded a financing partnership with Goldman Sachs. SolarCity’s recent success has in turn propelled its stock price up more than 160% in the past three months. Year-to-date, SolarCity’s stock has returned more than 300%.
It would be wise for current shareholders of SolarCity to take some profits and for interested investors to wait for a pullback before getting in. Bulls make money, bears make money, pigs get slaughtered. SolarCity Corp (NASDAQ:SCTY)’s stock has had a tremendous run, which has been described by Raymond James analyst Pavel Molchanov as “bubble-like.” Also, a June 11 lock-up expiration date will, according to Credit Suisse, increase SolarCity’s tradeable float by 8 to 10 times. This in turn will loosen up a short squeeze on the stock believed to have contributed to its rise and put downward pressure on the stock.
However, there are several catalysts (besides SolarCity’s strong business mode) that should propel SolarCity higher in the medium and long-term.
By the end of the third quarter of 2013, SolarCity Corp (NASDAQ:SCTY) plans to have fully transitioned from performing energy efficiency upgrades themselves to recommending third-party vendors that specialize in such upgrades to its customers. This in turn should generate significant additional revenue for SolarCity as more vendors pay SolarCity referral fees for introductions to potential customers.
SolarCity also has significant growth potential. SolarCity is aggressively expanding, forging partnerships with Walgreen Company (NYSE:WAG) and Wal-Mart Stores, Inc. (NYSE:WMT) to equip select stores with solar panels. It also recently announced a $65 million partnership with Honda, which will market SolarCity Corp (NASDAQ:SCTY) solar projects to Honda’s millions of customers.
Right now, SolarCity is undertaking the largest residential solar photovoltaic project in American history, called Project SolarStrong. Through this project, SolarCity will provide solar power to up to 120,000 military housing units. Moreover, SolarCity has partnered with Shea Homes to develop SheaXero communities, which include environmentally conscious “no electric bill homes.” Although it has over 57,400 customers and numerous partnerships with communities and corporations, SolarCity Corp (NASDAQ:SCTY)’s current market penetration of the 14 states it operates in is only 0.12%. The company has a lot of room to grow and is just getting started.
Given the attractiveness of its services, its aggressive expansion, and its tremendous expansion opportunities, SolarCity has huge variables working in its favor. However, its stratospheric stock performance may have gotten ahead of the company. Keep an eye out for SolarCity Corp (NASDAQ:SCTY)’s stock performance after the June 11 lock-up expiration. If the shares cool down a little, review the company’s fundamentals and catalysts and invest accordingly.
George Liu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article The Solar Stock That’s on Fire originally appeared on Fool.com.
George 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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