Two Reasons Why SolarCity’s Stock is Down

SolarCity lost focus while trying to become a vertically integrated nationwide construction company, a business model that is extremely difficult to execute. This has left its consumer offering mediocre at best.

Before diving into the details of why SolarCity stock is getting killed, let’s figure out what they do really well. How did they become, at one point, a five billion dollar company?

SolarCity’s success is based on their marketing, sales, and financing. Their financing vehicles gave their army of overpaid sales reps an easy product to sell; pay nothing upfront, have overall lower electric payments, and don’t worry about maintenance. And then the company poured money into growth, to buy market share, and they did. Today they have installed around 40% of the residential market. With buying market share, they also created the hands-down biggest and worst brand in the residential industry. But the same strengths that made SolarCity so successful are now hurting them.

Last week, SolarCity’s stock was hovering around its 52 weeks low with the short interest percent of a float at 39%1 – meaning a fairly high number of investors are betting against the stock – their once $5B market cap has shrunk to under $2B.

They have attempted to exploit the full value chain of solar by squeezing margins out of every piece of the pie. Meanwhile, there are banks out there that specifically finance solar loans, there are manufacturers that specifically make solar panels, there are online marketplaces that specifically sell solar, there are companies that specifically do O&M, and there are installers that specifically install solar. SolarCity does all of these – and they are no longer the most efficient at any.

This lack of focus has caused SolarCity’s stock to be crushed for two reasons. One is that their customer acquisition costs have soared while buying growth. The second is that the market has trended away from third-party-owned solar systems causing their industry-leading product to not sustain the forecasted growth. A harder product to sell leads to even higher customer acquisition costs – they’re stuck in the snowball effect.

Reason #1

SolarCity’s sales and marketing engine spent whatever it took to hit growth numbers – causing their customer acquisition cost to go up as the rest of the industry continued to trend down.  They established massive partnerships with the likes of Home Depot and Best Buy, which according to many of their ex-employees, is an extremely costly customer acquisition channel. Using a few web tools you can quickly find that SolarCity pours money into online ads with a complete shotgun approach, continuing to target customers who already had gone solar with them (there are relatively simple analytic techniques to prevent this). After all of this extensive spending, their volume missed the mark big, causing sales costs to skyrocket to a staggering $0.97/watt in the first quarter of 2016 (almost $6,000 to acquire a single customer on an average 6kW system)! Their fixed sales costs went up with expected growth, and the numbers simply didn’t hit.  

So where did this expected volume go? Aside from SolarCity losing volume from pulling out of regulatory impaired Nevada, it turns out that when consumers start looking beyond the biggest and worst brand, they realize that SolarCity’s product offering is really not that attractive.

Reason #2

Market share has started to shift away from their flagship leasing model and is trending toward ownership through solar loans. Through this market pressure and other external factors, SolarCity threw together a loan package in an incredibly short period of time and labeled it MyPower, only to rescind the offer a year later deeming MyPower a “distraction”, according to Greentech Media. Reasons behind the MyPower failure can be found in this SolarCity MyPower Review.

It seems that SolarCity knows that to stay ahead, they need to change. Their staggering cash price of $5.10/watt, which stayed consistent for every single solar system they sold regardless of size, has finally seen reductions in price. However, their price is still not at a rate that would be considered market competitive.

The solar industry is working its way through adolescence with some serious growing pains. SolarCity is getting crushed. SunEdison’s $10 billion market cap evaporated in less than 10 months. Yet the industry is actually exploding with growth. The door knocking and cold-calling days will soon be over. The exploiting of homeowners, who are trying to save a buck on their electric bill, and end up getting ripped off, needs to end.

Every day, and into most nights, my team at Solar.com strives to make sure we come out on top – by delivering a top-notch experience, ensuring quality, and delivering unbeatable pricing, all online.  We don’t install solar, we don’t finance solar, and we don’t manufacture solar – but we connect homeowners to those specific companies that do each of those the best. And our bids prove that it’s working, as we consistently see SolarCity’s prices 40%+ higher than the bids we receive in our marketplace.

Full disclosure, I own a solar marketplace, Solar.com, which takes customers through a hassle-free bidding process to find the best solar deal on the market. I am not currently nor do I intend to be an investor in SolarCity.

Sources:

1 www.nasdaq.com