First Solar, Inc. (FSLR), SolarCity Corp (SCTY): 1 Solar Company That Is Out of This World

Solar panel installer and financing company SolarCity Corp (NASDAQ:SCTY) may have bucked the trend among struggling U.S. solar players. Since its IPO late last year, the stock has skyrocketed more than 55%, fueled by encouraging statistics such as “a new customer [on average] every five minutes.” At the moment, the U.S. can’t compete with foreign companies when it comes to manufacturing panels, and this company is well aware. After a strong earnings release, and plenty of room to run, this may be the most compelling solar company yet. Here’s what you need to know about SolarCity.

Shining bright
You know the story by now. Tons of U.S. and international solar companies, such as First Solar, Inc. (NASDAQ:FSLR) and China-based Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP) have struggled to adapt to the violent shifts in solar demand. The latter is on its way to bankruptcy court and, with $1.14 billion in outstanding debt, could become one of the biggest U.S.-listed Chinese company bankruptcies in many years. This has particularly scary implications for U.S. bondholders, who would likely come second to their Chinese counterparts.

First Solar, Inc. (NASDAQ:FSLR) was only a few years ago the shining star of U.S. solar players, trading at more than $300 per share, and pumping out panels faster than the speed of light. But, because of Chinese innovation, which has led to a 50% drop in module costs in just three years, the company cannot compete, especially with the volatile short-term shifts in demand.

The story is far different for a relatively new solar player, though. SolarCity Corp (NASDAQ:SCTY) has taken a more consistent, supplementary approach to the business. This has allowed the stock to outperform, with far less volatility, the solar industry and the market as a whole. Debuting on the market in mid-December, this solar energy system designer, installer, and financier has proven, thus far, that solar can be a predictable, sustainable business.

We can find proof of this in the company’s most recent earnings release.

In 2012, SolarCity Corp (NASDAQ:SCTY)’s customer base grew 243%, and installed more than $1 billion worth of solar energy systems. Using cheap, foreign-made solar panels, the company focuses on high-value design and installation — far removing it from the panel manufacturing business, which has been one of the most difficult to run given long lead times for plant building, mismatched with quick shifts in panel demand.

The company, whose chairman is technologist and electric-car-making spaceman Elon Musk, saw recurring operating lease revenue (one of the major cash-faucets) doubled from $7 million, to $14 million in the fourth quarter. Total revenue grew from $20.7 million to $25.3 million. Gross profit margin made a huge leap to 56%, from 40% in the year-ago quarter. Though the company had a negative bottom line, the fourth quarter generated $64.7 million in operating cash flow.

On the full year front, lease revenue jumped 106%, to $47.6 million, total revenues grew to $128.7 million, from $59.6 million, and gross profit margins hit 40%, up from 21% in 2011.

The financials may seem a bit confusing on their surface, but its important for investors to focus on the number of new energy contracts. These are investments for the company up front, but create long-term, predictable cash streams that increase as time goes on. SolarCity Corp (NASDAQ:SCTY) should still be considered a very young company, and its nearly 27,000 new energy contracts from 2012 alone will, in time, bring bottom line earnings far out of the red.

Why I love this business