SolarCity Moves into Manufacturing with Silevo Takeover - Analyst Blog

The leading residential solar installer in the U.S., SolarCity Inc. SCTY has acquired Californian solar panel maker, Silevo Inc., marking a strategic move to get into the solar manufacturing market. The market more than welcomed the news, pushing its stock price higher by 17.58% yesterday.

About Silveo

Launched in 2007, Silevo is a solar technology company headquartered in Silicon Valley. The company is also building production capabilities in Hangzhou, China. Silevo has introduced the use of silicon for solar that offers cost-effective, high-performance solar modules for speedy acceleration of grid parity and widespread solar adoption.

Terms of the Deal

SolarCity's Silevo transaction came at a cost of $200 million. It is also obligated to pay $150 million based on megawatt production and cost targets through 2016.

What does this mean for SolarCity?

Silevo has a planned plant in Buffalo, NY that SolarCity intends to expand to over 1 gigawatt (GW). The plant is expected to be operational by the next two years. This solar-panel module plant will likely triple the size of the largest solar plant in the U.S., competing at par with Chinese manufacturers. SolarCity will not stop at this. The company plans to produce an astonishing 10 GW of panels from its factories in the future.

Silevo manufactures panels which have a peak efficiency level of 18.4%. It has also produced cells with 22% efficiency on a production scale. With the commissioning of the 1 GW factory, SolarCity expects cell efficiencies to rise to 24%, bringing up panel efficiency to 20% to 21%. Additionally, Silevo has the finest technology team among all PV manufacturers. This is not a tall claim, as the company produces highly efficient cells from copper instead of the more expensive silver for the grid lines. This has enabled Silevo to drastically cut production costs.

For SolarCity, its endeavors are well supported by a booming U.S. solar market. SolarCity sees installations climbing to as much as 900 MW to 1 GW by 2015. It also expects a million rooftop solar customers by 2018.

Hence, this paradigm shift from residential solar-panel installation and financing to outright manufacturing will bring SolarCity one step closer to being a fully integrated solar power provider, with presence across the entire spectrum of the solar panel supply chain.

The solar industry rallied in 2013 following a difficult period since 2011. The U.S. Energy Information Administration EIA estimates that U.S solar demand increased more than 32% in 2013. For 2014, the EIA projects that U.S. solar energy consumption will rise by roughly 35%. The expected increase in demand is likely to fuel top-line growth at the solar manufacturers.

A Look at the Financials

At the end of first-quarter 2014, SolarCity's cash balance was $525.9 million (including restricted cash). If SolarCity gets into full scale module manufacturing, the company will necessarily require a substantial pool of funds to enhance manufacturing capacity and step up R&D.

Competition

The foil to SolarCity's ambitious plans will come from who else but the Chinese solar panel manufacturers. Let's not forget that they have tremendous government support as well as economies of scale that sharply cut panel prices.  

The company will also face hard competition from the largest U.S. solar panel manufacturer, First Solar Inc. FSLR as well as SunPower Corp. SPWR.

To End Up

SolarCity has focused on installing and financing solar panels for homes and businesses. The company allows residential customers to pay back for their solar installations on a monthly basis over an extended period of 20 years. This not only helps customers to evade bulky upfront payments, but also lends top-line visibility to the company.

The Silevo buyout despite its risks will likely bring low-cost green energy to the markets. It will help evade the adverse impact of higher tariffs levied on Chinese-made modules in the U.S. Moreover, Silevo's highly automated plant would keep labor costs low. However, how these lofty plans work out for SolarCity, particularly on its pockets, is yet to be seen.

Backed by Tesla Motors Inc. TSLA founder Elon Musk, SolarCity presently carries a Zacks Rank #4 (Sell).