SolarCity (SCTY.DL) stock is down 45% in the past 30 days, but if you think this is your chance to buy into a solar provider at a discount, think again.
Traditionally known for disrupting the outdated energy industry by providing renewable electricity directly to homeowners, SolarCity has trumped the massive growth in the solar market. Its customer base, now over 300,000, has grown at a 94% annual rate since 2012. Still, the company believes it's penetrated only 1% of the U.S. market. Revenues last quarter were $114 million, compared to a massive $60 billion total electricity market.
SolarCity would like you to think that the sky's the limit in terms of growth opportunities. Unfortunately, it seems like the limit is dictated by something much more mundane, access to capital.
Think of SolarCity as a bank, not a solar company
In its simplest form, the business can be broken down as borrowing at a low rate and lending at a higher one. The company finances the installation of solar panels in return for long-term, monthly payments (like a loan). Because banks can accept deposits and access the Fed, they typically have a reliable source of funds. SolarCity's business model doesn't have that luxury, meaning that it is indefinitely reliant on further sources of funding to continue growing.
A recent announcement from the company shows the fragility of this growth.
On Oct. 30th, it announced that is was significantly cutting back expansion plans, with finite access to capital to blame. While new sources of funding are still ample (it recently closed a deal to finance $400 million in solar projects), cash isn't flowing in fast enough for the company to maintain its impressive growth rates. According to CEO Lyndon Rive, "though we expect our deployments to grow in 2016, we are not targeting the same growth rates that have gotten us to our current scale going forward."
As investors slowly accept that SolarCity can't grow as fast as the market, the premium that investors had been assigning the company for rapid sales growth has fallen dramatically. The massive drop in share price over the past 12 months has stemmed almost exclusively from a lower valuation multiple.
Limited funding isn't the only issue
If only finite sources of funding were SolarCity's only problem. Its basic value proposition to customers is that it can save on their electricity bills. While there will always be a small portion of customers that shop on the basis of environmentalism, mass adoption of solar is largely contingent on a single factor: cost savings.
Unfortunately, one of the biggest factors contributing to cheap solar is seeing its final days. By the end of 2016, the Solar Investment Tax Credit is expected to expire for residential and commercial solar installations. This means the tax credit for residential solar will go from 30% to 0% and from 30% to 10% for commercial installations.
For a significant portion of metro areas, the incentive to switch to solar will be erased. Without this tax credit, SolarCity’s business model of leasing solar panels will undoubtable witness a large decline in installations.
A bet on SolarCity is not a bet on solar
If you're anticipating a long-term move towards solar, an investment in SolarCity is surprisingly not the answer. Instead, a bet on the company hinges on two factors: its access to funding and the extension of a single tax credit. While the ever-falling price of solar panels will eventually boost adoption rates over the long-haul, the next few years of growth for SolarCity will be driven by factors that have nothing to do with energy.
