What You Need to Know About SolarCity


SolarCity has entered the public market with a bang, gaining 625% from its IPO price in 2012. A company that installs solar panels and finances a customer's lease doesn't seem like a market-crushing solar company or a complex business to understand, but there's more to SolarCity than meets the eye.

I recently had a chance to talk to SolarCity Vice President of Investor Relations Aaron Chew and Senior Director of Communications Jonathan Bass to learn more about the company and where it's going in the future. Below is the first part of an overview of the company and what I learned from these insiders.

What is SolarCity?
On the surface, SolarCity is an installer of solar panels and a supplier of financing. But the inner workings of how the company became an installation powerhouse is important for investors to understand.

SolarCity workers installing panels on a residential rooftop. Image courtesy of SolarCity.

The first step to SolarCity's success is sales. The company has one of the best brands in solar and a massive sales force that includes phone sales, door-to-door sales, and even Home Depot outlets. A major part of the sales staff's role is educating customers on solar power and offering products that are easy to understand. The solar lease has become the fuel of SolarCity's growth because it can be offered to customers for $0 down and a lower cost of electricity than what consumers pay for the grid. Buyers don't have to worry about tax credits, installation costs, or maintenance; they just pay a set monthly amount.

For SolarCity, there are a few advantages to this model. First, it can build scale in sales, can lower installation costs with scale and acquisitions like Zep Solar this year, and can line up financing that consumers couldn't do themselves. SolarCity generates its value from this combination.

The value of solar
When SolarCity puts an installation on a residential or commercial rooftop, it sets financing and price for the project in a fashion that creates long-term value for the company. It calculates a value of the installation in what's called retained value. This is the present value of all cash flow once a project is contracted and then discounted to the present date at a 6% discount rate. So, for a 20-year residential lease SolarCity is trying to calculate the value that project will create long term.

For investors, retained value is the most important number to keep an eye on for SolarCity. At the end of last quarter, the company had $846 million of total retained value, encompassing $496 million of contracted value and $350 million of renewal value. What do these figures include and assume?

The contracted value should be a reliable number, but the renewal figure has risk because it's a prediction of whether customers will renew leases 10-20 years in the future. Chew said that for residential installations SolarCity assumes 100% renewal with about a 10% reduction in the price of energy at that time. But this is discounted over 30 years; put another way, of $35,000 of expected revenueinflow from a solar project, only about $4,000 of that is in the renewal.

Other factors that complicate the renewal number is the fact that many commercial leases are set for 10 years and are more likely to be renewed than a 20-year residential installation. Then there's the value of having a relationship with a customer that's intangible, especially 20 years down the road. The renewal portion is an important value creator, but the exact amount of value is difficult to predict because the solar industry of a decade from now may look nothing like it does today. Still, these insights should give investors a better understanding of what retained value includes.

Since most of SolarCity's installations are leased to users, retained value is the vast majority of the value the company creates. Investors should keep an eye on the gross figures for both contracted and renewal value, as well as retained value per watt, which will measure how much margin SolarCity creates over the long term. As long as leasing is the dominant product in overall residential solar, these three numbers will show how well SolarCity is doing.

More on SolarCity
I'll be back tomorrow with more from our discussion, including what SolarCity sees as the future of energy storage, what securitization means for the company, and how SolarCity is positioning itself for the future.

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The article What You Need to Know About SolarCity originally appeared on Fool.com.

Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. 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.

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Originally published