One of the top IPOs over the past few months is SolarCity (NASDAQ:SCTY), a top installer of solar panels. The stock is up 127% from its IPO price of $8, which included a first-day jump of nearly 50%.
If you had taken a look at the S-1 — and, of course, read IPO Playbook — you will have noticed some key factors:
- Powerful Business Model. Its customers do not pay large up-front costs to install solar panels (which can easily be over $30,000). Instead, they are required to sign 20-year lease contracts. This certainly makes it easier for customers to say “yes” to solar. Plus, the business model allows SolarCity to create highly sustainable revenues. At the time of the IPO, the company had 31,600 customers — a mix of residential customers, government departments and businesses like Walmart (NYSE:WMT) and Intel (NASDAQ:INTC). During the first half of 2012, revenues soared from $20.3 million to $71.4 million.
- Big-Time Backers. The co-founder of SolarCity is Elon Musk, who knows how to trail-blaze cutting-edge technologies. Keep in mind that he’s the mastermind of breakout companies like Tesla (NASDAQ:TSLA), SpaceX and eBay’s (NASDAQ:EBAY) PayPal.
- Costs. Over the years, there has been a general decline in solar panel prices. If this trend continues — which seems reasonable — it will likely mean ongoing improvements in margins for SolarCity.
All these factors are mostly long-term, though — not enough to propel a short-term bull move. So what were some of the catalysts for SolarCity’s spike?
Well, when the company’s offering came out, IPO investors were fairly glum … and the deal’s price of $8 was below the $13-$15 range. But as the IPO market started to warm up, investors began to move into SolarCity.
Plus, there’s a general bull move going on right now in solar stocks. And this week, the sector got another boost. A report from GTM Research predicted that the market for leased solar panels will grow 39% per year until 2016. And yes, it noted that SolarCity is in the best position to benefit from the megatrend.
There are definitely some important lessons here for IPO investors. First of all, it’s crucial to look for secular trends. They are necessary to keep up investor interest in stocks — and also lead to strong ongoing support from analysts.
Next, IPO investors should always be attentive to valuations. The market can easily get skittish, which will provide great opportunities to pick up growth companies at bargain prices.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.