SolarCity takes breather from hyper-growth, focus on cost controls. Wall Street freaks out.
SolarCity, the biggest solar installer in the U.S., has been growing really fast in the past few years. They reached for the first time an annualized rate of 1 GW of solar installations (256 MW during the 3rd quarter). Cumulative solar megawatts installed at the end of the 3rd quarter were 1,674 MW, up 86% year-over-year, with 298,030 customers as of their latest quarterly report (a growth of 77% since last year during the same quarter). The aggregate of the solar panels that they have installed have generated 1.5 Terawatt-hour in the past year, an increase of about 75% compared to last year during the same period. Few businesses grow that fast...
But the challenge for SolarCity is that they model means that they have big upfront costs when they install new solar systems, and they make their money slowly over years, as their customers pay them their monthly lease payments. Growing really fast exacerbates the issue: Expenses are ballooning up rapidly, much faster than the cash is coming in, creating bigger and bigger losses. To finance itself despite this lack of profits, the company has been borrowing money and raising equity, but the market for debt has been tightening lately, making it harder to keep doing that, especially at growth rates of 70%+ per year.
© Margaret Badore
That's probably why Lyndon Rive, the company's CEO and Elon Musk's cousin, said this on its 3rd quarter conference call:
"The downside of growing at 80 percent or 90 percent is you have to make investments into the infrastructure today, but you only recognize the benefit of that investment two quarters to three quarters later. That leaves a cost to that scale. Now that we have achieved scale, we as an executive team and the board have decided to focus on cost reduction and being cash flow positive by the end of 2016."
It sounds good at first glance, but what is implied is that the company intends to slow down its growth for a while.
Wall Street certainly didn't like the message:
The stock lost about 25% of its value since that comment was made.
But if we think about this from a longer-term point of view (not something that Wall Street is known for), it doesn't seem like a bad thing. If the company was growing too fast for its financial capacity, then slowing down and making sure that things are sustainable will only give it a better footing for the future. SolarCity has been very effective at making solar power more mainstream (along with other solar installers, of course), so we should be happy if they become cash-flow positive, which isn't the same as earning an actual accounting profit, but at least there's more cash coming in than going out.
Strengthening the financial foundation should make the company more resilient if they are faced with unforeseen shocks (a big recession, a frozen credit market, etc), so it sounds like the prudent thing to do, unlike chasing growth at all costs just to please Wall Street.
Another noteworthy thing for SolarCity during the past quarter: They officially launched their international expansion with their first installations in Mexico. If there's a country that has lots of sun, it's Mexico...