SolarCity Corp (SCTY): This Is Why You Don’t Bet Against Elon Musk

SolarCity CorpAre the Bears Wrong on SolarCity Stock?

Everyone knows that Elon Musk is betting big on electric cars. But don’t forget that in his vision, solar panels will also play a big role in the future. That’s why you should take a look at another one of his brilliant creations—SolarCity Corp (NASDAQ: SCTY) stock.

Right now, SolarCity stock is certainly not the hottest commodity in the market. In the past three months, it lost more than 20%. Year-to-date, SCTY stock has plunged a staggering 57%.

One of the reasons behind SCTY stock’s dismal performance was the downfall of an industry giant—Sunedison Inc (OTCMKTS:SUNEQ). As one of the biggest renewable energy companies in the world, SunEdison’s announcement of filing for bankruptcy protection has sent shockwaves across the industry.

The main point, though, is that SolarCity couldn’t be more different than SunEdison. SunEdison ran into liquidity problems because of years of debt-fueled acquisitions. SolarCity, on the other hand, while it also has debt, runs an entirely different kind of business.

First of all, SolarCity’s main business is not building giant solar farms. Rather, it mostly targets residential consumers. And there is a huge benefit for doing so—energy costs are highest at the residential level.

Secondly, SolarCity is not just installing solar panels on residents’ rooftops. In some ways, it can also be considered a financing company.

Many consumers want to use solar energy to power their homes, but when they learn how much money they will need to pay for the installation of solar panels, the idea doesn’t sound that appealing anymore. That’s where SolarCity comes into play.

SolarCity offers something called “power purchasing agreements,” or PPAs.

Here’s how it works: When SolarCity installs solar panels on your rooftop, you don’t need to pay a penny upfront. Instead, you buy electricity from SolarCity at a low price. That’s how SolarCity is also a financing company.

Who came up with this brilliant idea? Elon Musk did. In fact, the company was founded based on Musk’s suggestion, with him also being the chairman and largest shareholder.

Of course, the concept only works if consumers see real savings by going with SolarCity. Do they? Well, if you are an average homeowner in California, you can save 20% on your energy bills starting from day one with no upfront costs for installation to cover. So, I’d say yes, they do. (Source: “Investor Presentation,” SolarCity Corp, February 2016.)

The best part is that you can even sell electricity generated from solar panels back to utility companies.

The plan has certainly worked. In the first quarter of 2016, SolarCity installed a total of 214 megawatts of solar panels, up 40% year-over-year and exceeding its guidance by 19%. (Source: “SolarCity First Quarter 2016 Shareholder Letter,” SolarCity Corp, May 9, 2016.)

In the quarter, revenue was the highlight in SolarCity’s financials. Due to the surge in installations, the company’s revenue grew 82% year-over-year to $123 million. It also beat Wall Street’s expectations of $110 million in revenue.

The company’s bottom line, on the other hand, was less impressive. SolarCity reported an adjusted loss of $2.56 per share, wider than analysts’ estimates of a $2.32-per-share loss.

Still, there are quite a few catalysts that could help SCTY stock going forward. In particular, the drivers behind the shortfall in the first quarter have largely been addressed. The company now faces greater regulatory clarity in key states of operation and is launching new loan products and expanding into new states. Moreover, its contracted Solar Renewable Energy Credits (SRECs) portfolio is expected to generate approximately $122 million over the next 10 years.

The Bottom Line on SolarCity Stock

At the end of the day, keep in mind just how powerful the sun is. If solar panels are just 20% efficient (which has already been achieved in labs), we could feasibly cover a land area about the size of Spain to power the entire Earth with renewable energy in 2030. (Source: “Here’s How Much of the World Would Need to Be Covered in Solar Panels to Power Earth,” Tech Insider, September 24, 2015.)

Even Elon Musk himself said last year that if we covered just a corner of Utah or Nevada with solar panels, we could power the entire U.S. with solar energy. (Source: “Elon Musk Just Made a Very Important Point About Solar Energy,” Tech Insider, December 15, 2015.)

Don’t bet against Elon Musk. If SolarCity manages to control its costs and improve the bottom line, the booming solar business would give SCTY stock a strong chance at making a comeback.