Is SCTY Stock About to Explode?
SolarCity Corp (NASDAQ:SCTY) is trading at an absurdly low discount right now, particularly since investors are looking at SCTY stock through the wrong lens. They are measuring SolarCity against peers like First Solar, Inc., which doesn’t make any sense.
In fact, I can’t emphasize the degree to which that doesn’t make sense. SolarCity’s valuation is inherently different because the company is focused on rooftop solar whereas firms like First Solar operate on a utility-scale model.
First Solar builds entire power plants and sells electricity wholesale to utility companies. Naturally, the company signs long-term contracts with those utility companies and that provides First Solar with a stable foundation. It’s a solid model for providing steady cash flow.
By contrast, SolarCity develops and installs solar panels onto residential and commercial buildings. And this ideal, of putting solar panels on our homes and businesses, is fundamentally different from the utility-scale model. It aims to disseminate the collection of energy.
What’s really interesting is that these different philosophies lead to completely different business models. If SolarCity reached “economies of scale,” meaning its costs per unit are minimized, then the firm would rake in ungodly sums of money. First Solar would be a tiny little kingdom beside SolarCity’s sprawling empire.
But for it to reach scale, SolarCity had to attempt something no other solar company had dared to try. The company started offering financing and leasing options so that people could actually afford solar panels. Once it did that, SolarCity basically became a financial firm.
But the company was forced to pay for that expansion by taking on more and more debt. That system can stay in place for only so long before the debt becomes unsustainable, so SolarCity had to find a solution.
And it did. The company realized it could divide up each asset into a few portions and sell those in big bundles to institutional investors. The investors would take on a portion of the revenue, but more importantly, it would eliminate SolarCity’s debt conundrum. (Source: “SolarCity’s New $70M Securitized Rooftop Solar Portfolio,” GreenTechMedia, April 3, 2016.)
This is a useful strategy that’s been applied a lot in the mortgage and credit card markets. It’s effectively a way of slicing up the risk and passing it to a bunch of institutional investors, while allowing the company to focus on what it does best.
And not only would the securitization reduce the risk of SolarCity’s growing debt load, but the expansion would eventually bring the company to scale. And at scale, SolarCity’s debt would vanish.
Here’s a chart to put it all into perspective:
It is a bold and ambitious idea to have our energy generation systems woven into the regular architecture of communities. For a long time, it felt like that vision was missing something, a final link to make the business model feasible. SolarCity’s securitization strategy is that missing puzzle piece.
We’ll see in due time if the market is willing to accept solar projects as collateral.
In the meantime, SolarCity should just keep spreading the gospel of solar power while getting investors to bear the downside risk. If its experiment goes well, we could see SCTY stock push ahead of the pack, scoring massive gains for its shareholders.