SCTY Stock: Why SolarCity Corp Is at a Crossroads

SCTY StockLooking Ahead for SCTY Stock

SolarCity Corp (NASDAQ:SCTY) is currently in a make-or-break position. The same thing that worries most investors about SolarCity is what could send SCTY stock soaring.

As I’m going to explain, SolarCity is at a crossroads. Its debt load keeps expanding and investors are starting to worry. Can the company manage its funding? Or will it go the same way as SunEdison Inc?

Remember it was less than one year ago that SunEdison was “the world’s biggest renewable energy company.” It was expanding aggressively, building projects left, right, and center. Eventually, SunEdison would sell those projects to one of its yieldcos, but in the meantime, its balance sheet was bloated with debt.

The company’s liabilities grew bloated enough to start a run on SUNE stock. Within six months, shares had fallen by more than 90%. It was an alarming drop for a once-promising company.

We saw that saga end last month when SunEdison filed for Chapter 11 bankruptcy. The endless drama is finally over, but some questions remain unanswered. For instance, were the problems specific to SunEdison or were they relevant to the solar industry writ large?

SolarCity’s fate depends on the answer to that question. You see, SCTY stock is founded on a leverage-based strategy. It carries some significant risks, but that also means the potential gains are enormous.

Let me explain…

For SolarCity to acquire more customers, it has to take on more debt. That is a truth all SUNE stockholders should make their peace with. The company is paying workers to go out in trucks and install solar panels on rooftops. Workers, trucks, solar panels: it’s an expensive business.

Knowing this, SolarCity keeps a close eye on its financing costs. It has experimented with new ways of raising expansion money, like converting its solar projects into asset-backed securities. That basically means SolarCity is selling “solar bonds” to offset its debt obligations. (Source: “Investor Presentation,” SolarCity Corp, February 2, 2016.)

By managing the spread between its borrowing rate and the rate on “solar bonds,” SolarCity can keep expanding. It’s also helpful that the company is reaching what economists call “economies of scale.” That’s just a fancy way of saying the cost of each new watt SolarCity installs is getting cheaper.

Installations used to cost the company $3.25 per watt in January 2014. But by the end of 2015, the per-watt cost was down to $2.71, with projections hinting at $2.25 by 2017. I’m impressed at how quickly SolarCity is slashing internal costs. (Source: “Cost Calculation Methodology,” SolarCity Corp, February 9, 2016.)

What’s especially good is this: SolarCity can now fund the installation of a panel without breaking the bank. And this is where the upside can kick in. The firm was considered extremely risky because it was so leveraged—it was sitting on a mountain of debt.

But we’ve never seen SolarCity like this, with its financing larger than its installation costs. According to CEO Lyndon Rive, it is the “most important metric” of the year.

“For the first time in the company’s history, the asset financing that we get is higher than the actual cost of the development,” Rive said during a conference call. “And so intentionally, the development cost is cash neutral and developing us long return on revenue.”

He may be right. SolarCity is a highly leveraged company that can break either way. If the firm’s financing patterns settle into a rhythm, SCTY stock would likely take the path to huge gains.