Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
I've just added shares of SolarCity to my Strategy Lab model growth portfolio.
I like to invest in companies that are disrupting old ways of doing things. Netflix represents a tidal wave of change to the traditional pay TV model. Google and Facebook are major forces in the transition from old-world print and TV advertising toward online ads. Tesla Motors is threatening yesterday's automobile industry by replacing the internal combustion engine with a fully electric drivetrain with superior performance and much lower operating costs. These companies are all leaders in their respective fields. Similarly, SolarCity Corp. is the leader in bringing low-cost solar electricity to the masses, and I believe the solar industry now has unstoppable momentum.
I first wrote about SolarCity back in March of this year. The share price was about $61 (U.S.) back then, and I felt the company was worth a closer look. I've since bought shares personally. Since that time, not only has the company made great progress, but the shares are even cheaper at about $55. I'm taking advantage of the discount for my model portfolio.
Solar power is fascinating to me. Even where I live in the Toronto area with cloudy, snowy winters, the annual sunshine is perfectly adequate to generate a lot of free electrical power. Solar-power systems have traditionally been expensive, but costs are dropping quickly. I expect that in the next five years we'll get to a point where the majority of North American households would save money by investing in a solar rooftop system instead of paying for grid power. This should hold true even without any government subsidies.
Solar power should be a commodity business. It isn't rocket science to buy solar panels, roof mounting systems, power inverters, and all of the other necessary equipment to put a sun-powered electrical generating station on your roof. But SolarCity seems to be moving much faster than anyone else to dominate this market. If they succeed, I expect market-pounding returns from the stock.
SolarCity started seeing enormous growth by leasing solar-power systems to customers in California, and has since expanded to cover more states. The solar-power systems are financed and constructed by SolarCity, and leased to customers who sign a long-term power purchase agreement. Customers end up paying less for their power right from the start of the contract, and SolarCity collects recurring revenue over the life of the typical 20-year agreement.
By systematizing the business, SolarCity has been able to scale very quickly resulting in incredible growth. Last quarter, they reported a whopping 154-per-cent growth in solar projects booked. Their 36-per-cent market share in the U.S. residential solar market is greater than the next 50 competitors combined. Talk about a dominant market position!
SolarCity's vertical integration strategy is very much like Tesla Motors. Perhaps by no coincidence either; Elon Musk is not only the CEO of Tesla but the chairman of SolarCity and the cousin of its CEO, Lyndon Rive. (The two companies also share what most investors would consider above-average risk profiles.) Tesla runs its own stores, service centres, and is even building a gigantic battery factory in Nevada so it can grow production to half a million cars per year.
Similarly, SolarCity is vertically integrated by controlling solar-panel manufacturing, installation hardware and everything required for system design, sales and even remote management after the system goes live. The two companies have also teamed up to deploy lithium ion batteries alongside solar-power systems to store power when excess is generated, and supply power when the sun isn't shining. I feel that this Tesla/SolarCity partnership could lead to smarter, cheaper solar systems that allow customers to practically disconnect from the grid and still have a nearly bulletproof supply of electricity.
There is plenty of growth in this industry. SolarCity is on track to grow from 168,000 customers today to more than one million customers in 2018. At that point, they'll likely bring in more than $1-billion in recurring, contracted annual revenue. Yet, they'll have achieved only 2.5 per cent market penetration in the United States alone. Plenty of growth will be left at home and by expanding into other geographies.
SolarCity has a market capitalization of about $5.3-billion today. They are already the clear leader in the space, but it is poised to become a much larger and very profitable solar energy company provided they keep executing well. In 10 years, I suspect solar will be so common nobody thinks twice about it. The leaders in this space should be worth many tens of billions of dollars. I want exposure to this obvious growth trend, and SolarCity represents what I believe to be the most innovative, well-managed and fastest growing play on the trend.
Chris Umiastowski