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.