The San Francisco Board of Supervisors passed a bill on Wednesday that could foretell some major long-term gains for SolarCity Corp (SCTY). The bill requires all small- and medium-sized residential and commercial newbuilds in the city to install solar panels.
You didn’t have to tell investors twice. SCTY stock shot up 7.8% on Wednesday, and was followed by an additional 3% bump on Thursday.
Although shares are still down 33% year-to-date, the recent rebound has been swift, and SolarCity shares are up 27% in the last month alone.
The big question is this: Does San Fran’s move mean anything substantive for SCTY stock in the months and years ahead? I think the answer is yes.
SCTY the Major Beneficiary of Law, Other Trends
Installing solar panels is sort of SolarCity’s thing, so expect it to be an overwhelming beneficiary of the San Francisco ruling. And while I don’t necessarily anticipate a massive sweep of such local laws passing across the country immediately, I think more towns will certainly follow.
The world’s getting greener, and increasingly, industry is leading the charge. In another move that may have longer-term implications for SCTY stock, Whole Foods Market, Inc. (WFM) announced it would use SolarCity to install panels at its stores across the country.
Whole Foods, not surprisingly, said it was retrofitting up to 100 of its locations in an effort to save money on energy. No longer can people argue that solar power isn’t economical.
One of the biggest reasons SCTY stock is still down so much for the year is the decision by Nevada to abandon net metering, which allowed SolarCity to pocket the difference between retail and wholesale electricity prices.
The fear is that more states will follow suit, and this is certainly possible and definitely poses a risk to SolarCity shares.
However, SolarCity has several powerful tools it can and has been using in recent years (and recent months) to help its business model become even more attractive. Because SolarCity’s customers don’t typically want to throw down $10,000 to $35,000 or more it can cost to install solar panels, the company typically offers financing.
While financing ensures (hopefully!) a steady flow of cash payments for years and often decades to come, SCTY still has the onus of paying the upfront installation costs. To keep this model sustainable, SolarCity has been bundling up the loans it originates and selling them to other parties. That way, it can transfer the risk off its balance sheet, and receive a large cash influx.
Not only does that fundamentally make sense, it also decreases the risk of dilution for SCTY stock owners, since the company is less likely to issue additional shares to raise capital.
The newer form of financing that SolarCity gained access to is somewhat esoteric, but quite helpful. They’re called solar renewable energy certificates (or SRECs), and SolarCity receives them for each megawatt hour of solar electricity its panels produce. They’re similar to carbon credits; various states require utilities to produce a certain amount of solar energy each year, and if utilities fall short they can buy these SRECs.
Several weeks ago, SCTY sold its first SREC-backed bond for $40 million, and many more may be in the works down the road.
All that’s to say: If and when more local laws like the one in San Francisco get passed, this is an automatic, chalk-it-up-in-the-win-column, long-term business for SCTY, and those additional projects are becoming easier to finance by the day.
While analysts don’t expect the company to be profitable for a number of years, SolarCity is playing the long game. Over time, it should become a reliable cash flow machine.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
