NEW YORK (TheStreet) -- SolarCity (SCTY) just announced the acquisition of Silevo, a solar technology and manufacturing company whose modules have achieved a unique combination of high energy output and low cost.
Solar City is a name I owned earlier in the year but I sold the stock back in April. Although I do not currently own the stock, it is still an interesting company to keep an eye on, particularly given its close connection to Elon Musk.
Solar City's new plant in Buffalo will be one of the biggest in the world and is reminiscent of Tesla's (TSLA) planned Gigafactory, the enormous battery manufacturing facility that will produce lower cost batteries. The SolarCity PV panel plant will be powered substantially through hydroelectric power generated by the nearby Niagara Falls.
The acquisition news was well received by the market and the stock traded up significantly, closing Wednesday at $67.15, up over 18% for the year to date.
Basically, SolarCity is buying competitive advantage in cost and supply, much like Tesla plans to do with battery technology. SolarCity said on the conference call it's concerned that a few years down the road there will not be enough panel production to fit the company's needs.
There also may be other acquisitions and partnerships in the future with the aim of expanding low cost capacity. Another interesting note: famed serial entrepreneur Elon Musk was on the conference call. He may not run SolarCity but he is actively involved in the company's management.
SolarCity's CEO Lyndon Rive, is Elon Musk's cousin. Elon Musk, Tesla's CEO and chairman and the founder and CEO of SpaceX, is also the Chairman of SolarCity. This linkage is particularly significant given the potential business synergies between SolarCity and Tesla Motors.
SolarCity offer investors an attractive way to invest in the growing solar industry with a recurring revenue model. Up until this acquisition, the company did not manufacture its own solar panels, meaning that its financial results were not negatively impacted by declining solar panel prices and margin pressure. So this move signifies a change in strategic direction, but is not entirely unexpected.
The Leasing Model
SolarCity sells solar panel systems to residential and commercial customers, but the bulk of its business comes from the leasing side. SolarCity will generally install a system for free in exchange for a 20-year lease contract. SolarCity utilizes tax incentives and third-party financing (including crowdfunding) to cover the installation costs.
The leasing model creates upfront costs for SolarCity in the short-term, but creates a reliable future income stream as the number of solar installations continues to increase. From the customer perspective there is no upfront cost of installation which facilitates a simple switch to solar.
The value proposition from SolarCity's perspective is it has a consistent, predictable stream of 20-year cash flows. The economics also improve from decreasing costs. This is why the cost of solar panels is a critical piece of the equation and a key reason why this acquisition is being so well received by the market.
The company's recurring revenue model has been a source of accounting controversy, causing delayed earnings and accounting restatements. The company says backward measures are the wrong way to value the company and that investors should focus on the present value of the long-term lease contracts, a number it refers to as "retained value." At the end of 2013, SolarCity said this measure topped $1 billion. But these methods have earned the company its share of critics highlighted in a recent Wall Street Journal "Heard on the Street" article questioning the company's valuation.
Best Stocks Now Analysis
I am a big fan of residential solar and have seen first-hand its rapid growth potential living here in sunny San Diego. SolarCity is a mid-cap name with a market capitalization of $5 billion.
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SolarCity's growth potential and valuation is hard to measure using conventional methods. Its growth is tied to solar installation growth which is rising at a rapid pace. Like Elon Musk's other companies, SolarCity is an industry innovator and disruptor.
The company's performance has been rewarded by the market with a 12-month return of more than 51%, giving it a momentum grade of B-.
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The price chart for SolarCity has rebounded on good quarterly earnings results reported the beginning of May and this recent acquisition news. The stock is still trading significantly off its highs for the year at the end of February, but the sentiment is obviously improving dramatically.
I do not currently have a position in the shares, but I like it here.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.