Finally, utilities increase prices at healthy rates. That alone pushes utility electricity to become more expensive than solar electricity systems installed today in just a few years , even accounting for declines in panel efficiency. One estimate says that after taking both time-of-use electricity pricing from utilities and lifetime value of solar power production into account, one-third of the U.S. population would reach grid parity within the next five years.
The uncertainty about the government rebates it’s getting as well as uncertainty about when (if ever) solar power becomes competitive with utility power (with or without subsidies) is leading to uncertainty about the company’s future. However, given the long-term growth of solar power and consistent declines in the costs of components, I believe the company will be able to flourish.
Valuation
Because SolarCity Corp (NASDAQ:SCTY)’s not yet profitable, it’s difficult to value it. However, taking what the company calls “Retained Value” (RV) – which is the present value of those future lease cash flows after removing costs to operate the solar systems and pay back investors, it is possible to estimate a value. At the end of the last quarter, the company reported RV of $662 million . At last night’s market cap of $2.3 billion, it’s trading at 3.5-times that.
The model assumes that SolarCity Corp (NASDAQ:SCTY)’s estimates are correct for installing 270 MW of capacity this year (which would be 72% year-over-year growth ), and halves that growth each year through 2017. It also decreases the amount of RV from estimated increases to future lease payments. These estimates try to account for a rising cost of capital (which would lower RV), as well as loss of government subsidies and potential increases in the costs of panels. From this, I get about $1.6 billion of RV at the end of 2017. If the company trades at 3-times that (a lower multiple than today), it would have a market cap of $4.8 billion, a bit more than twice last night’s price.
Note that 45% of the $662 million of RV comes from assuming all of its customers will sign up for another 10-year lease after the current lease expires . Cut that down to 1/3 of its customers doing so, and the 2017 projected market cap drops to $3.8 billion .
The return from last night’s price to either of those projected prices in 2017 is significantly higher than the market’s long-term average. Therefore, I’m going to be buying SolarCity Corp (NASDAQ:SCTY) for my MUE port as soon as possible.
I’d be happy to share my valuation model or discuss the company and solar energy prospects on the MUE discussion board. Hope to see you there!
The article SolarCity Is a Buy at Today’s Price originally appeared on Fool.com and is written by Jim Mueller.
Jim Mueller owns shares of SolarCity. The Motley Fool has no position in any of the stocks mentioned.
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