SolarCity Corp (NASDAQ:SCTY) got a vote of confidence from one of the world’s most innovative companies yesterday, as Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) plowed $300 million into a new initiative from the solar panel installer.
SCTY is raising a $750 million fund to finance at least 25,000 residential solar panel installations with the remaining $450 million balance mostly coming from debt financing.
GOOG stock, plagued by currency headwinds and an inability to diversify its revenue stream from its core advertising business, is off about 7% in the last year. (The S&P 500 is up about 14% in the same period.)
SolarCity shares are in even more dire straits, as the SCTY stock price cratered 40% in the last 52 weeks as profits remain elusive.
Why SolarCity Corp and Google Inc Investors Should Rejoice
Why should investors in GOOG — one of Silicon Valley’s most revered players — care about the $300 million SCTY deal? Why celebrate an investment in a business like SolarCity, one that isn’t even profitable?
GOOG stock investors might find themselves justifiably wary of idealistic endeavors after the commercial failure of Google Glass and seemingly harebrained ventures into “moonshot projects” like hoverboards and Wonkaesque space elevators.
Reading between the lines, one could easily misinterpret Google’s explanation of the deal as being another overly optimistic foray into something unlikely to pan out. Sidd Mundra, renewable energy principal at Google, had this to say about the $300 million project, which is GOOG’s largest investment in renewable energy to date:
“We’re happy to support SolarCity’s mission to help families reduce their carbon footprint and energy costs. It’s good for the environment, good for families and also makes good business sense.”
Mundra is right: environmental consciousness and making money aren’t mutually exclusive. GOOG isn’t actually investing in SCTY stock, it’s a “tax equity” investor, meaning in exchange for its funding Google will receive certain tax breaks tied to the solar panels SCTY installs. Such deals generally return around 8% to 10% a year.
Google stock, which currently has nearly $65 billion in cash and short-term investments on its books, could certainly enjoy a lift if the search giant decides to start putting more capital to work like this.
The deal should also be beneficial for SCTY stock, and not only because of the long-term leasing revenues this project should generate. In selling GOOG its tax credits, SolarCity, which doesn’t generate any taxable profit, is essentially pawning off assets that are entirely useless to SCTY in the first place.
The $300 million investment is a much bigger deal for SCTY, which had revenue of $255 million in 2014, than GOOG. As long as SolarCity remains unprofitable, deals like this make a lot of sense. But in the coming years as SCTY vertically integrates and moves into solar panel manufacturing — gaining “massive economies of scale” in the process — SolarCity won’t always be willing to sell those tax credits.
As of this writing John Divine was long shares of GOOG stock, GOOGL stock, and Jan 2016 SCTY $80 calls. You can follow him on Twitter at @divinebizkid or email him at email@example.com.