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SolarCity Corp (SCTY) Is Just Another Form of Tesla Motors Inc (TSLA)

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Tesla Motors Inc (NASDAQ:TSLA)SolarCity Corp (NASDAQ:SCTY) and Tesla Motors Inc (NASDAQ:TSLA) are the two darlings of Elon Musk. On the face of it, these two companies are very different. The former leases solar panels while the latter is an electric vehicle (EV) company. But when you dig deep into the core method of operations, you’re likely to find two striking similarities in the core operations of both companies.

If this method of operations turns out successful, this will be a bonanza for both companies. If, on the other hand, this business method proves futile, there’s more than a probable chance that other players, like First Solar, Inc. (NASDAQ:FSLR), will reign.

Business model

SolarCity Corp (NASDAQ:SCTY) provides renewable electricity directly to homeowners, businesses, and governments by offering solar power to consumers at prices lower than typical utility costs. In a sense, it’s a specialized financier. The company leases solar panels to homeowners on a 20-year contract, with no up-front cost to its customers. By doing so, SolarCity guarantees a predictable stream of lease payments.

It’s a great business model. It appeals to homeowners because there aren’t any up-front payments, and it appeals to the company because once a panel is installed — all that SolarCity Corp (NASDAQ:SCTY) has to do is collect its monthly interest paychecks. In a way, Tesla Motors Inc (NASDAQ:TSLA) operates in a very similar business model. It sells its highly expensive cars by offering customers extremely generous payment terms — a low first down-payment, to be followed by months (usually 36 months) of ongoing payments of principal and interest.

Offering generous financing is great for attracting first-time customers, but it’s also very risky. Troubles begin to mount once customers refuse or unable to keep up with payments. In SolarCity Corp (NASDAQ:SCTY)’s case, the company will incur the costs of installation and removal of panels.

In Tesla Motors Inc (NASDAQ:TSLA)’s case, the company will keep some of the payments and receive a used car instead of the brand new car it gave the customer in the first place. In contrast to these two companies, First Solar, Inc. (NASDAQ:FSLR) engages in a much safer practice. It actually generates power from solar resources, packs it, and sells it to third parties. There’s no inherent financing model involved.

Heavy subsidies

Both companies rely heavily on government subsidies because normally, renewable energy initiatives can’t stand on their feet without the government giving them a hand. That’s fair and legitimate. But Elon Musk has definitely taken this to the next level. A look at the Department of Treasury Section 1603 data shows that SolarCity Corp (NASDAQ:SCTY) received 27 awards across 15 states amounting to $95.6 million in cash from a long-standing tax credit for renewable-energy investment turned into a direct grant in the stimulus bill.

SolarCity has recently applied for an additional $325 million in these stimulus grants, according to the SEC filing. And it seems that not only the government is in love with SolarCity Corp (NASDAQ:SCTY), investment bankers are too. Although the company is still losing money, it isn’t finding any difficulties in raising capital for expansion. In mid-May, the company inked a new $500 million round of financing from Goldman Sachs, which will enable it to install 110 megawatts of additional power on residential homes.

And Tesla Motors Inc (NASDAQ:TSLA) is leaving SolarCity in the dust. Since inception, Tesla has received a total of $456 million as a federal loan. That’s a staggering subsidy granted to one single company. In favor of Tesla Motors Inc (NASDAQ:TSLA), I must add that the company recently paid off its loan in full, nine years early, thanks to a round of share issuance. But it doesn’t mean that Tesla won’t need another government loan in the future.

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