A Solar Stock With a Better Business Model
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Solar companies heard some good news recently, as Warren Buffett just demonstrated his confidence in the industry with a power plant buy. MidAmerican Solar, owned by Berkshire Hathaway, (NYSE: BRK-A) (NYSE: BRK-B) bought the Antelope Valley Solar Plants from SunPower, reported Chris Clarke at KCET. Warren Buffett definitely knows how to find bargains, but investors in the solar power business have been burned before, so a solar power company needs a good business plan. SolarCity (NASDAQ: SCTY) may have what it takes.
The Fool's Jeremy Bowman explained that SolarCity operates like a utility, not a manufacturer. The current solar panel glut actually helps SolarCity, while weakening solar panel manufacturers, and the glut may persist for a few more years. Matt Daily, at Reuters, reported that GTM Research expects solar panels to remain cheap until 2015. As long as Chinese manufacturers can keep producing inexpensive solar panels, manufacturers elsewhere will face cost pressures, and SolarCity can benefit from lower solar panel prices.
SolarCity's utility model introduces an additional risk for investors. The company currently isn't regulated like a utility, which gives it a competitive advantage because traditional utilities face strict regulations. In its prospectus, SolarCity explains that the Federal Energy Regulatory Commission has granted the company exemptions from utility regulations on its solar installations, so far. SolarCity currently operates at a loss to fuel its rapid growth, so if the company did become subject to utility regulations, its cash burn rate would accelerate.
The SolarCity prospectus also reports the company's recent revenue figures. Although SolarCity's revenue fell from $32.6 million in 2009 to $32.4 million in 2010, the company achieved $59.6 million in sales for 2011 and reached $103.4 million in sales during the first three quarters of 2012. SolarCity achieved sales of $38.8 million in the first three quarters of 2011, so the 2012 figure represents a 166% improvement over the previous period, although going by installation capacity, the company has an expected 2013 growth rate of around 60%. Going forward, SolarCity announced that it deployed solar installations with a total capacity of 156 megawatts in 2012 and expected to deploy installations with a total capacity of 250 megawatts in 2013. To maintain this growth, SolarCity has to maintain its pricing model.
SolarCity plans to compete on price with other energy providers, and the solar utility can provide power for less than what other utilities charge in some locations, although the company does admit that it benefits from government solar incentives right now in its prospectus. Cheap solar panels definitely help SolarCity, but natural gas has also been cheap recently because of shale projects. Cheap natural gas might also be temporary, though. Felicity Carus, at AOL Energy, reported that Chevron (NYSE: CVX) manager Andre Peterhans explained that the price of $2 per MMBtu that natural gas reached in April 2012 didn't cover development costs, and the natural gas price could once again rise to $4 per MMBtu or even more. Cheap natural gas isn't the only potential threat from Chevron, though.
Chevron has deployed solar installations at California schools and government buildings, and the energy company's web site lists a total solar capacity of 22 MW. These operations give the energy company a public relations boost, but they also demonstrate its solar power capabilities. Chevron has $21.6 billion in the bank and great expertise in energy production, so it could easily challenge SolarCity if the solar market takes off. Large, integrated energy businesses probably pose the biggest threats to SolarCity, although the company also competes with small scale installers.
SolarCity brings the rapid growth model of a tech startup to the utility business. Instead of the huge dividends that utilities frequently pay out, SolarCity offers soaring sales along with sizable risks. Cheap solar panels and government solar incentives don't look like they're going away in the near future, but SolarCity currently runs in the red even with these advantages. Growth over profits may work for now, but the solar company will need to work on its margins eventually. This solar stock looks very risky, but it definitely shows promise.
enovinson has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Chevron. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!