Real but Reasonable Risks in SolarCity's Purchase of Silevo

NEW YORK (TheStreet) -- Our Herb Greenberg is very down on SolarCity (SCTY).

That Chairman Elon Musk (also of Tesla (TSLA), of course), rather than the cousins who operate the company, Lyndon and Peter Rive, announced this week's deal to buy Silevo got Herb's spidey-sense tingling.

Greenberg was already suspicious last month when SolarCity began "couponing," in his words, with Groupon (GRPN). Offering deals cuts margins and indicates slowing demand, he wrote.

He's right. But as Bill Gunderson notes today, he could be missing a key point on Silevo, a point about technology and scale.

Who is right, the bull or the bear? Let's take a closer look.

Today's photovoltaic and thin-film technologies are reaching the end of their lifespans. Like minicomputers in the 1970s, there is only so far they can go in terms of price-performance.

The next technology will not be a "final stage" for solar, but it could deliver power at the same costs as fossil fuel plants, without subsidies. Each new generation of product also comes with higher costs that shake out smaller players.

Silevo, a Fremont, Calif., start-up for which SolarCity reportedly is paying as much as $350 million in stock -- 5.6% of its market cap -- says its Triex technology offers that superior price-performance.

Triex combines the low temperatures of thin film with the high efficiency of traditional photovoltaics, using a 40-year old technology called Metal Insulated Semiconductor, first described in papers by Martin Greene at the University of New South Wales.

Musk says Silevo has licked the problems of producing the higher-efficiency panels at low cost, and at scale, using a factory in Hangzhou, China. The efficiency is on par with SunPower's (SPWR) E19/425 panels, with room to improve.

Silevo's control of the technology will let it use New York tax incentives to build a plant in Buffalo, N.Y., writes the Buffalo News, that can benefit from antidumping duties against Chinese panels imposed earlier this year.

Musk is betting that scale and SolarCity's ability to finance new installations will give Silevo enough running room so that, when better technology comes along, SolarCity becomes the logical buyer.

The other big U.S. suppliers, First Solar (FSLR) and SunPower, have been working at utility scale because of difficulties financing small projects, notes SolarCellCentral, and utility-scale projects dominate the current market, notes GTM Research.

SolarCity's ability to finance small projects gave it 32% of the residential market in the third quarter of last year, according to GreenTech Media. Greenberg spoke to a competitor in this small project market for his Reality Check.

Does that make Solarcity a buy? Most traders felt so yesterday. Herb disagrees. The present speculative price is too rich for me, but if bears such as Herb Greenberg drove down the price, I'd be a buyer.

At the time of publication the author owned no stock in companies mentioned in this story.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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