They have been a darling because they have been on the right side of the solar transaction. By selling panels, creating demand for them, companies like SolarCity Corp (NASDAQ:SCTY) get the wide margins available before the costs of solar power fall below those of other grid energy.
Still, as much as I’m bullish on solar stocks, now may be the time for investors here to take their profits in SolarCity Corp (NASDAQ:SCTY) and look elsewhere for a while. Here’s why.
What SolarCity does
First, let’s talk about what SolarCity does. It sells and finances solar panel installations, mainly for residential customers. There are several other businesses in this space, but SolarCity Corp (NASDAQ:SCTY) has a certain Musk about it, as in chairman of the board Elon Musk, whose success with Tesla Motors Inc (NASDAQ:TSLA), SpaceX and PayPal has many comparing him with Richard Branson and other great entrepreneurs of the past.
Beyond the fact that Musk may be at the peak of his own hype cycle, a look at SolarCity Corp (NASDAQ:SCTY)’s books should show you they’re over-rated. The company is making sales at a $120 million/year rate, it has yet to make a profit, it’s hardly generating any cash flow, yet it’s worth $2.76 billion?
True, the balance sheet looks tasty, with debt-to-assets under 25% and the asset base having grown 50% in less than a year, to nearly $1.5 billion. But this has every appearance of a great opportunity that’s overpriced.
A crowding field
SolarCity Corp (NASDAQ:SCTY)’s business model requires no technical expertise to execute, simply salesmanship and financing. The company’s success has rivals plowing capital into the space like there’s no tomorrow.
The capital is coming from two directions, from power companies and from banks.
Real Goods Solar, Inc. (NASDAQ:RSOL), which first went public during the first flash of solar power hype in the late 2000s, has a market cap of just $64 million, and was beaten down by heavy losses in the middle of last year. But it’s fully capable of doing just as many deals as SolarCity, and while the balance sheet is presently a mess, it’s nothing a little capital won’t cure.
Now may not be the time to walk in – deal makers want to sweat out current shareholders before injecting new capital – but now that it’s clear that the business model works, this company is going to get another look at some point.
JPMorgan is also leading a $630 million injection of financing into solar projects sold by privately-held SunRun, another SolarCity rival. SunRun works through local partners who do the heavy lifting, and selling, of small projects, whereas SolarCity goes direct.
But if the big banks are marching into the space and looking for partners, SolarCity’s effort to control the whole process is going to come under pressure. A lot of companies are going to be calling on customers in the next year, and deals may become harder to come by.
Does SolarCity have a way out?
SolarCity is in dire threat of being commoditized, and becoming just one operator among many, unless it can find a way to differentiate itself.
So before giving up on it, consider this. SolarCity is looking to add batteries to its mix of products it can finance. By adding storage to their systems, SolarCity customers reduce their dependence on local utilities, many of whom are trying to get out of buying power from these customers, and even charge them for their back-up grid connections, claiming they are “freeloading” on utility lines. This becomes increasingly important as more homes get solar power and as the cost of panels falls below that of other types of energy, known as “grid parity.”
If and when SolarCity can make financing of storage happen, it will become attractive as an investment again. So take your profits now, let the stock fall down, and then keep an eye out for this next evolution in the solar power game and be ready to get back in for some serious coin.
The article Solar Financing Gets Crowded originally appeared on Fool.com and is written by Dana Blankenhorn.
Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Dana is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
