SolarCity Is What They Said They Were

Anyone truly surprised by the earnings report SolarCity  delivered to investors last night hasn't been paying attention. The company deployed 78 MW of residential solar, expects to deploy 101 MW in the fourth quarter, and saw retained value per watt installed jump to $1.91. All of these figures line up perfectly with what management said it would do this year . Heck, even guidance for next year was unchanged.

Wall Street gets it wrong again
So, why is the stock down today? Investors were "disappointed" with fourth quarter earnings guidance of a $0.55 to $0.65 loss per share versus Wall Street's guess of $0.53.

Keep in mind that Wall Street is really shooting in the dark with SolarCity. The company has little history as a public company, it's barely starting to generate revenue from leases that last 20+ years, and the company is investing heavily in acquisitions and growth that will drive future value, making operating expenses difficult to predict quarter to quarter. Anyone, including SolarCity, who could guess the company's earnings down to the penny three months ahead of time, should get a gold star.

The other factor to remember is that SolarCity's profit next quarter doesn't really matter long-term. SolarCity is spending money to acquire and install projects that will pay off for 20+ years. That's why investors should be looking at the company's installation growth rate of up to 89% next year, retained value per watt increasing $0.10 sequentially to $1.37 per watt, and total retained value increasing 28% sequentially to $846 million before looking at what's happening on the bottom line.

What we really learned
Now that we've gotten earnings reports from U.S. solar giants First Solar SunPower , and SolarCity we can start to draw some conclusions about where the industry stands.

First, utility scale solar is still the dominant profit driver for the solar industry short-term. First Solar's earnings of $2.28 per share and SunPower's $0.44 per share were both driven by utility scale projects, which typically come with higher margins than just selling modules. SolarCity also sees this as an attractive market, signing a 15 MW deal with Hawaiian Electric Company in October .

Second, residential solar is growing and SolarCity is taking share. Not only is the residential business as a whole growing, it's becoming more profitable to installers like SolarCity and SunPower. These companies provide leases to homeowners and with costs down and leasing terms not declining at the same rate there's more profit to be made. This manifests in SolarCity's growing retained value, which was $1.91 per watt installed last quarter. SunPower, on the other hand, isn't as big and is having trouble making enough panels to satisfy demand in Japan, utility project, commercial installations, and residential leasing. Put all of this together and SolarCity is taking residential solar market share and doing so with increased profitability.

Both the utility and residential markets are growing and First Solar, SunPower, and SolarCity are going to be the winners. The stock you pick just depends on which segment you want to play.

Back to SolarCity
Was SolarCity's third quarter or guidance for the fourth quarter really enough to spark a sell-off in the stock? Obviously the market thinks so but I think SolarCity is performing as we've expected, so I think this is a case of a hot stock that needed an excuse to sell off. Increased retained value per watt is encouraging and if the company can keep up growth in 2015 and beyond it will be a steal for investors.

If you've been eyeing shares of SolarCity I think today's sell-off is a nice opportunity to buy. Once again, a solar stock has sold off after a solid earnings reports, but long-term the market will realize the value of this company. It's only a matter of time at this point.

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Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. 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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