Elon Musk's Grand Vision for SolarCity (SCTY)

Joel Anderson  |

Elon Musk’s SolarCity (SCTY) saw shares pop to the tune of 17.58% on Tuesday, climbing nearly $10 a share on action that opened even and then gained steam as the day progressed. Driving the gains was the big news that SolarCity, previously in the business of installing solar panels and then selling power to its customers, was taking a step towards vertical integration and buying Fremont, Calif.-based panel manufacturer Silevo.

And the stock wasn’t done. Despite gapping down 2% at the opening bell to $63.17 a share on Wednesday, the stock gained steadily throughout the day to an intraday peak of $68.30, a nearly 7% gain, before pulling back sharply heading into the afternoon. All told, the stock has swelled by more than a quarter of its previous value in just three trading days.

SolarCity’s Been Pivoting Towards Vertical Integration for Some Time

Normally a company with a market cap in excess of $5 billion purchasing another company for just $350 million wouldn’t necessarily be enough to move the needle like this. It’s also just another in a string of SolarCity acquisitions that included Zep Solar, Paramount Solar, and Common Assets. However, the Silevo acquisition did seem to offer the market more clarity on SolarCity’s long-term plans. And the market clearly liked what it saw.

SolarCity’s business model revolves around limiting the up-front costs of installing solar capacity to entice more residential and business customers to bite. SolarCity handles the installation of the panels and maintains ownership of the arrays. It then signs a 25-year lease with the owner of the building to sell the power they generate, usually at a discount to the power that would otherwise be purchased off of the grid. Instead of having to wait years for the savings on electricity to pay for the initial cost of installation, SolarCity customers should see savings immediately.

However, this has meant that SolarCity hasn’t previously been engaged in building its own solar panels. Instead, the company was effectively acting as a middle man between manufacturers and the public, providing a financing structure for a product produced elsewhere. But, with the purchase of Silevo, it’s become crystal clear that Elon Musk’s long-term vision for the company is much, much bigger than that.

And few things tend to get the markets going like the grand plans from leaders perceived to be transformative visionaries. It’s like cat nip to growth investors.

A Whole New Ballgame for SolarCity

"Our intent is to combine what we believe is fundamentally the best photovoltaic technology with massive economies of scale to achieve a breakthrough in the cost of solar power. Although no other acquisitions are currently being contemplated, SolarCity may acquire additional photovoltaics companies as needed to ensure clear technology leadership and we plan to grow internal engineering significantly," said chairman Elon Musk, CTO Peter Rive, and CEO Lyndon Rive in a blog post on Tuesday.

And SolarCity doesn’t appear to just be dipping its toe into the manufacturing pool. Part of the Silevo deal involves the construction of a massive new manufacturing facility in New York.

"We are in discussions with the state of New York to build the initial manufacturing plant, continuing a relationship developed by the Silevo team," said the blog post. "At a targeted capacity greater than 1 GW within the next two years, it will be one of the single largest solar panel production plants in the world. This will be followed in subsequent years by one or more significantly larger plants at an order of magnitude greater annual production capacity."

Silevo already has the leading conversion metric in the industry at 21%, meaning in converts about a fifth of the sun’s energy hitting the panel into electricity, and its technology has the promise of improving that even further in the years to come. And now Musk appears intent on matching that quality with a whole ton of quantity.

From Middle Man to One-Stop Shop for Solar Technology

SolarCity was already soaring based just on its business model of owning solar arrays and selling the power to its customers. The company signed a major deal with Wal-Mart (WMT) to install solar panels on more than 130 locations in 2011, a figure that was boosted by another 60 to include 75% of the major chain’s California stores two years later.

However, the current state of expansion appears to indicate that SolarCity is looking much further down the road and imagining far bigger things for solar technology in the future. Wal-Mart, for instance, has some 4,500 locations in the United States, at least 4,300 of which still don’t have SolarCity’s panels on them.

And now, the company appears intent on taking a more active role at each step of the supply chain necessary to do just that. With each acquisition, SolarCity appears to be bringing another piece of the puzzle under its own roof and moving further away from its previous role.

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The blog post appears to clearly indicate a desire to have the company not just build its own panels, but build the best panels out there, ideally making their product more attractive while also reducing costs. And it doesn’t stop there. Zep Solar, acquired last October, is the country’s leading manufacturer of mounting devices for solar modules.

The company even appears ready to use the burgeoning crowdfunding arena to help its customers finance their projects, acquiring Common Assets in January, a web-based investment platform that lets retail investors help fund solar projects through debt-based vehicles.

On the whole, it’s becoming more and more apparent how each of these links fits onto SolarCity’s existing chain, potentially making it longer and stronger in the process. SolarCity appears poised to be ready to offer its own panels, mounted on its own devices, and installed on your home or business without any major upfront costs.

Stored Capacity: the Holy Grail of the Solar Industry

Of course, there’s one more potential link added to the end of this chain that would make a bigger difference than any others: stored capacity.

Anyone close to the solar industry is likely aware that, even as the efficiency and cost of solar panels continue to make putting arrays on homes and businesses more and more attractive, there’s one big issue: the sun only shines during the day. No matter how spiffy the solar array on your roof may be, it’s not going to let you watch TV after the sun’s gone down.

That’s why efficiently storing solar energy during the day to be meted out in the evening has long been viewed as the sea-change moment for the industry. Particularly for residences in the American southwest, where heavy sunshine year round could easily power many homes, a rooftop solar array with a functioning battery system could potentially begin to seriously cut into their utility costs over time.

And, of course, that’s where the name Musk starts to get many investors drooling. Mention Elon Musk and you immediately get people thinking of his other company, Tesla (TSLA) , of which he’s CEO as well as Chairman of the Board. And mention Tesla and you’re on your way to talk of the cutting edge of battery technology and energy storage.

While the two companies remain separate, the fact that Musk, already viewed as THE compelling visionary entrepreneur of our time, is so prominently engaged with both companies makes it easy to speculate that the same battery technology being developed for Tesla’s cars could be adapted for use in SolarCity’s solar arrays.

Morgan Stanley analysts observed in February that the battery currently deployed in Tesla’s Model S can store enough energy to power an average U.S. household for three and a half days.

The Future of the Solar Industry

SolarCity already has 110,000 customers in the United States and it’s currently on pace to install half a gigawatt in capacity in 2014. However, that makes the plan to build a plant capable of producing 1 gigawatt in capacity each year seem a touch ambitious. However, in their blog post, the company’s leaders insisted that it was because the growth in solar was only just beginning.

“Given that there is excess supplier capacity today, this may seem counter-intuitive to some who follow the solar industry,” they wrote. “What we are trying to address is not the lay of the land today, where there are indeed too many suppliers, most of whom are producing relatively low photonic efficiency solar cells at uncompelling costs, but how we see the future developing.”

From a very, very macro perspective, solar has long been big on potential but lagging behind in practicality. There has, however, long been the idea that solar technology could ultimately hit a “tipping point.” Once the technology can advance to the point that it’s cost-effective, it would have every advantage over virtually any other form of generating electricity, a win-win power source that replenishes its fuel at no cost while creating zero pollution. If the costs were ever right, the growth would quickly become explosive.

And Elon Musk, and SolarCity, clearly appear to believe that that “tipping point” is close. At least, close enough that they’re ready to break ground on a new plant that would be able to build twice as much solar capacity annually as the company’s currently projected to install this year, a year that would already represent a 90% increase in installations over 2013. And one that they openly admit would be injecting more supply into what the company already acknowledges to be a buyer’s market. In fact, the new plant would be able to produce 21% of the entire installed capacity in the United States for 2013, a record-breaking year that represented a 41% jump over 2012’s numbers.

It represents a very big and potentially very risky bet that solar is a big part of our nation’s future.

And not bets like the many of the previous ones, made by pie-in-the-sky environmentalists using federal subsidies, but a bet by practical capitalists intent on creating profits. And, more notably, a bet that involves a substantial investment of capital. Right or wrong, SolarCity appears to be building itself into the Amazon (AMZN) of residential solar, a vertically-integrated supplier built to give consumers exactly what they want.

If solar is in fact reaching a “tipping point,” SolarCity and Elon Musk are positioning themselves at the forefront of what could be a major economic shift, a place that’s historically been an extremely lucrative position to hold.


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