Summary
- If SolarCity succeeds in its manufacturing ambitions over the next few years, the company could very well become a leading solar module manufacturer.
- The previously significant technology risk associated with SolarCity's Riverbend manufacturing ambition has lessened significantly.
- SolarCity has an advantage over other manufacturers in that its modules will have captive demand due to the company's enormous residential business.
- While things look brighter than ever for SolarCity in terms of its manufacturing goals, significant manufacturing risks still linger.
Despite the fact that SolarCity (NASDAQ:
SCTY) is building the largest module manufacturing facility in North America, many still view the company as a mere rooftop solar installer. Disregarding the fact that SolarCity's current business model already involves much more than just solar module installations, the addition of manufacturing will truly make the solar installation aspects of the company comparatively insignificant. With the company
on schedule to complete the construction of its Riverbend facility despite a brutal winter, SolarCity's grand vision is starting to materialize.
The debate over the barriers to entry for the residential solar industry should soon become irrelevant given that residential solar is quickly becoming a smaller part of a larger whole. In other words, the residential solar industry will no longer be a standalone industry due to SolarCity's integration of module manufacturing, and the general integration of residential solar by an increasing number of module manufacturers. Given the trend of vertical integration within the solar industry, SolarCity has a headstart over most solar companies.
While there are certainly many risks associated with SolarCity, the company's potential upside more than makes up for such risks. Whereas many view SolarCity's ambitions as foolish and unattainable, the company has more than enough talent and resources to follow through on its goals. If SolarCity's Silevo plant turns out to be a success, the company will likely be unparalleled within the solar industry for the foreseeable future. Given that SolarCity's success in the manufacturing space seems more likely with each passing day, the company is on track to explode higher.
Silevo's Technology Risk is Falling
One major risk that has been associated with SolarCity's Silevo acquisition is that its slated module efficiencies will no longer be industry-leading by the time of module production. While this was a somewhat legitimate concern over a year ago, such a scenario seems increasingly unlikely as the factory will be up and running in about a year's time. So far, no real threats to SolarCity have emerged from other companies in terms of efficiency advancements, save for SunPower (NASDAQ:
SPWR).
With the exception of SunPower, no major module manufacturer will have efficiencies on the same level as SolarCity's planned efficiencies of
24%. With efficiencies of 20% currently considered as high-efficiency, it seems unlikely that any other major manufacturer will be able to significantly close the efficiency gap within a year. With such a major risk diminishing by the day, SolarCity's success in the manufacturing arena seems far more likely. With SolarCity on track to complete construction by its stated deadline, and manufacturing technology risks falling, the company's prospects as a module manufacturer looks bright.
Game-Changing Impact of Manufacturing Plans
While SolarCity has always made the scope of its manufacturing ambitions known, the full-extent of its potential impact does not seem to have registered with most investors. Even disregarding its planned 1 GW Riverbend factory, the company plans to build many
additional factories ranging from 5-10 GW in size after its initial factory is completed. To get a perspective on how large these factories would be, each one of these factories would be able to produce many more solar panels in one year than the largest solar manufacturer did in the entire year of 2014(Trina Solar (NYSE:
TSL) at 3.66 GW).
Not only would such additional factories make SolarCity one of the, if not the, largest solar module manufacturers in the world, but the company would also have captive demand given its own enormous residential solar operation. Such captive demand would allow the company to reduce logistics costs, which is a big deal in the margin-starved solar manufacturing industry. If SolarCity's manufacturing ambitions fully materialize, which looks increasingly probable by the day, SolarCity will likely be the largest producer and consumer of solar modules. Needless to say, this would make SolarCity one of the most undervalued solar companies currently in existence.
Challenges
It comes without saying that there are enormous risks associated with SolarCity's Riverbend factory, with the most glaring being that SolarCity modules will not be cost-effective with other leading solar modules manufacturers. While hitting its efficiency targets may not be a problem, hitting its cost targets may prove to be more difficult. If SolarCity cannot manage to create cost-effective panels, the company will likely lose billions in sunk costs. On the bright side, SolarCity will have more margin for error given the reduction of logistics costs(due to captive demand).
Conclusion
The next few years will have a huge impact on SolarCity's long-term fate, as its manufacturing ambitions have the power to firmly cement its place as both a leading residential solar company and manufacturer. On the other hand, its manufacturing ambitions could entirely destroy the company's prospects should they fail. While there is some middle ground between these two scenarios, the probability of either overwhelming success or failure is high.
The corner case outcomes of SolarCity's manufacturing goals will likely have hugely diverging effects on the company. If the factory's unprecedented scale does indeed play a massive role in bringing down costs and SolarCity's management is indeed competent in the manufacturing arena, the company could end up manufacturing the most cost-effective modules in the industry by far. On the other hand, the opposite of these scenarios could also be true, which means that SolarCity's modules will likely be sub-par by a wide margin.
In light of all this, the latter situation in which scale does indeed continue to play a large role at the 1 GW+ factory size levels and where SolarCity does indeed prove to be highly competent seems more likely. As such, the company has enormous upward growth potential. At a market capitalization of
$5.4B, the company is highly undervalued given that it is the largest residential solar company by far, and will very likely be the largest solar module manufacturer in under a decades time.