Tesla Motors (NASDAQ: TSLA) is too overpriced to be taken seriously by sensible investors, but what about Elon Musk’s other publicly traded company, SolarCity (NASDAQ: SCTY)? After all, SolarCity is fairly cheap, trading at $21.56 (€19.23) a share on March 28, 2016.

Yet its revenue has been growing dramatically for the past year. In December 2014, SolarCity reported $255.03 million (€227.44 million) in TTM revenues; that number grew to $258.96 million (€230.95 million) in March, $300.43 million (€267.93 million) in June, $355.95 million (€317.14 million) in September, and $399.62 million (€356.39 million) on Dec. 31, 2015, the last date for which revenue figures are available. SolarCity’s revenue grew by $144.59 million (€128.95 million), or a little over one third in a year.

Solar City’s Ambitious Business Plan

That is very impressive for an alternate energy company with an unproven business model. For those of you unfamiliar with it, SolarCity manufactures solar electric systems, which it leases to home and business owners in the United States. The systems are designed to back up and augment power from the electric grid, which is often unreliable in the U.S.

The company is also beginning to market the PowerWall battery backup system and other batteries manufactured by Tesla. For those of you unfamiliar with it, the PowerWall is a set of lithium ion batteries that can store up to 6.4 kilowatt hours of electricity.

Musk serves as the chairman of SolarCity  while his cousins, Lyndon Rive and Peter Rive, serve as Chief Executive Officer and Chief Technology Officer. The Rives founded the company with Musk’s help.

The vision behind SolarCity is to make solar electricity available to the average household. Musk and the Rives also intend to finance the dream by generating large amounts of float from lease payments on the solar systems. The float will be used to finance the construction of solar panel factories, including a large one in Buffalo in upstate New York.

The 1.2 million square-foot facility has been compared to Tesla’s Gigafactory, the gigantic battery plant that Musk is constructing in Northern Nevada. Musk and the Rives hope that the factory will be able to manufacture solar panels that are cheaper and more efficient than the ones they currently sell. In particular, they want to increase solar cell efficiency to 24% – the devices are currently 21% efficient.

Another plan is to produce enough solar panels to generate one gigawatt of electricity a year at the factory by 2017. A gigawatt is one billion watts of electricity. At some point in the future, SolarCity’s management team would like to produce enough solar panels to generate five gigawatts a year in the plant in Buffalo.

Solar City’s Shaky Business Model

SolarCity sells its solar panels with a zero down payment and offers 20-year leases. It hopes to generate float by from the monthly lease payments.

The incentive for customers is that the solar panels could reduce utility bills by up to 30% by selling excess electricity back to the utilities through net metering. In some American states, the law requires utilities to purchase electricity from customers. This effectively subsidizes the solar panel purchase.

Net metering is meeting stiff resistance from utilities that have successfully lobbied some state governments to curb the practice, The Wall Street Journal reported. The utilities’ argument is that the solar panel users are freeloading at the expense of customers that lack solar panels. The charge is that regular power customers are financing those with the solar panels.

SolarCity pulled out of the U.S. state of Nevada after its government eliminated most of the state subsidies for solar panel adoption. Two other states with a high level of solar panel adoption, Hawaii and Arizona, are considering cutting net metering subsidies. Similar measures are being considered in Colorado and Louisiana, where lots of the systems have been sold.

One major problem for SolarCity is that its markets are limited; 87% of the solar panels in the U.S. have been installed in just 10 of the 50 American states that offer subsidies, The Journal noted. To make matters, worse more than half of the panels are in just one state, California. There are 475,036 solar arrays in California and 315,187 in nine other states.

This means that there are two major problems with SolarCity’s business model. It is dependent on government subsidies, and its product has not been proven to have mass consumer appeal. Mass consumer appeal is vital because the company would presumably need to issue several million leases to pay for its giant new factory in Buffalo.

Is SolarCity Making Money?

Such massive expansion could be needed because SolarCity is still losing money from its business.

The company reported a net income of -$58.33 million (-€52.02 million), a free cash flow of -$823.04 million (-€734.01 million), and a negative cash from operations figure of -$789.88 million (-€704.43 million) on Dec. 31, 2015, yet there was some good news in its earnings report for those willing to dig.

SolarCity reported $2.395 billion (€2.14 billion) in cash from financing, which means that the lease payments are actually generating float. That number is also growing: Solar City reported making $1.49 billion (€1.33 billion) in cash from financing in December 2014, so its cash from financing increased by $905 million (€807.1 million) over the course of 2015.

SolarCity was also able to keep a lot of that cash; it had $393.86 million (€351.25 million) in cash and short-term investments on Dec. 31, 2015. That figure was down from $642.69 million (€573.17 million) in December 2014. This means SolarCity could have a hard time holding onto the cash, which does not seem like a value investment to me.

This indicates that SolarCity could have a highly profitable business model that generates a lot of cash, even though it loses a lot of money on its industrial activities. The company did report a profit margin of 4.01% for the fourth quarter of 2015. That makes SolarCity a great deal like an automobile manufacturer that makes much of its money from the financing of its products.

The best way to classify SolarCity would as a potential value investment. It has a business model capable of generating large amounts of cash if specific conditions are met, the conditions being government subsidies for solar-electric systems. Unfortunately, it is clear if those conditions can be maintained or replicated beyond certain parts of the United States.

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