Solar stocks have been one of the hottest sectors this year. A combination of positive factors — including rising emerging market demand for panels and newly renewed subsidies — has helped push solar stocks to highs not seen in years. One of the hottest of these has been the baby of billionaire Elon Musk: SolarCity (SCTY).
Elon Musk — the brains behind electric car maker Tesla (TSLA) — is the chairman of this residential solar installer, which has been one of the brightest solar stocks around. In fact, SCTY stock has surged 360% year to date. Given the growth potential of SolarCity, many analysts and SCTY stock investors have continued to bid up shares in a big way.
With that huge gain in hand, the question remains whether or not SCTY stock is a buy today for new investors. SolarCity stock certainly has the potential to outperform, yet it also carries some pretty big negatives.
Let’s take a look at some of the pros and cons of SCTY stock:
Pros on SCTY Stock
Expanding Operations: First things first, SolarCity isn’t like traditional solar stocks such as First Solar (FSLR). SCTY doesn’t actually make panels or wafers, but installs these products for residential and small commercial clients. This means it isn’t really affected by the whims of solar panel pricing. In fact, a glut of panels can actually help SCTY stock. And as an installer, SCTY is expanding quite rapidly. During the third quarter, SolarCity managed to add 12,386 new customers — a whopping 92% surge year-over-year. Overall, that makes it the nation’s largest and fastest-growing solar installer. And more good news for SolarCity stock investors: SCTY expects that number to continue rising and recently announced plans to open ten new operations/sales centers in California to take advantage of the trend towards clean energy. Ultimately, those sales will translate into higher profits down the road for SCTY stock.
TSLA Benefits: Aside from sharing visionary Elon Musk with booming TSLA stock, SCTY is sharing something else as well — its technology. One of the biggest issues with solar power is that it’s not a base load source of energy and doesn’t necessarily sync-up with user demand. Storage of energy is key … and SCTY may have found an answer. Using advanced battery technology from Elon Musk and Tesla, SCTY will now offer the ability for commercial enterprises to use its systems for storing energy and avoid paying “demand charges” in certain key solar markets. This proprietary system should help give it a leg up on the competition and add to its subscriber base — more good news for SolarCity stock investors.
Asset Securitization: One of main risks for SCTY stock has been its leasing business model. In an effort to help drive down costs for consumers, SCTY actually leases the panels and collects a fee each month. That put plenty of risk onto the SolarCity balance sheet. However, in another first for Elon Musk and crew, SCTY managed to launch a bond offering to investors that is backed by these lease payments. Think of the SolarCity bonds in the same vain as a mortgage-backed security. Essentially, it pushes some of the risk off of SCTY and onto the bondholders if customers default or miss payments. More importantly, investors ate up the offering and SolarCity is looking to complete more such deals in the future.