The SolarCity Bubble

NEW YORK ( TheStreet) -- SolarCity ( SCTY) is going to be the most controversial play on the market today, after jumping 23% Friday because it said business is good.

The company didn't announce results, but "metrics." It said it installed 78 megawatts of power during the third quarter, and is on track to install 278 MW for the full year, and about 500 MW next year.

It didn't say how much money it would make from all this, and in fact it has only come near to breaking even once, in the fourth quarter of 2012.

But it's looking at a growth rate of 90% next year, and since these are solar leases, it continues to own the contracts, which should generate $1.74 billion in cash over their working lives. The debt load on those assets has been falling steadily, and at the end of June was just 18% of the assets' value.

In a solar lease, the installer finances and controls the panels, and the roof owner agrees to pay for power from those panels over a set period. The Solar Energy Industries Association has said 68% of California's residential projects were financed this way in the second quarter of 2013, up from 48% two years ago.

California is a hot market for solar because utility rates there are above the costs of panel power. A "solar parity map" produced by the Institute for Local Self Reliance indicates there will be more than 16,000 megawatts of production there this year from commercial and residential installations, 6.9% of the total market, with the state's utilities targeting 20% of their load from solar overall.

In a solar lease, tax credits and other incentives are captured by the installer, who also bears the installation's costs. Roof owners pay a set rate for their power from the installer, which is said to be below the rate being charged on the grid, and excess power is sold back to the power company. SolarCity is talking of selling battery systems to leaseholders so that they can capture some of this excess.

The chief challenge to the model SolarCity offers is simply financing an installation from a bank, with the roof owner then capturing incentives for himself and negotiating directly with the power company. That is expected to become more feasible as the cost of systems, now $20,000-$30,000 per roof, continues to fall.

Another potential challenge down the road is IKEA, which announced last month it plans to sell CIGS panels produced by Hanergy of China, in England, for 5,700 British pounds ($9,120), with do-it-yourself installation. That's less than half the cost of a typical California roof installation now.

SolarCity is currently installing polysilicon panels, and last week acquired Zep Solar, which supplies mounting modules that also convert panels' DC power to AC for the grid, for $158 million in stock. Zep licenses its designs to Chinese polysilicon panel makers, who will now be paying those license fees to SolarCity.

In addition to the solar halo, SolarCity also has the Elon Musk halo. Co-founders Lyndon and Peter Rive are cousins of Musk, a native of South Africa who is also founder of SpaceX and Tesla Motors ( TSLA), and who previously co-founded Paypal. Musk's net worth in September was estimated at $8.8 billion.

Critics point out that this is a company that has never made money, which is irrelevant, and that it's closely manipulated by the founders, which is relevant. The company said last week it would sell $125 million in new equity, 3.4 million shares, to a collection of large shareholders, including Musk, which comes to under $37/share. The stock closed Friday at $47.18.

At its present market cap of $3.55 billion, SolarCity is selling at a premium of over 100% to its asset value. Even if it does dominate the solar leasing and installation market, and even if it's expecting to grow 90% next year, it's hard for me to see this valuation as anything other than a bubble, no matter how big a fan of solar I happen to be.

At the time of publication, the author owned no shares in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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