[caption id="" align="alignright" width="351"] Elon Musk[/caption]

SolarCity (NASDAQ:SCTY) is the most interesting company in the entire solar industry. Not because of any extraordinary innovations, but because of the man chairing the company. His name is Elon Musk. For those unfamiliar with him, imagine a less bombastic, real-world version of Tony Stark (Ironman). Like Tony Stark he has a very gifted mind, but unlike Tony Stark he has dedicated that mind to growing and developing a set of new age companies. Companies that he hopes will one day work in perfect congruence with one another. Whether or not that will happen is yet to be determined, but analyzing any of his ventures in isolation would be a mistake. That is not to say investors should attempt to price the relationships, but they do need to be know that the things happening at Tesla and SpaceX will have an impact on SolarCity. A slide in Tesla stock will mean a slide in SolarCity; the opposite is also true.

Elon Musk's companies are embryonic. They have incredible, grandiose plans, but all the work is in front of them. They have shown aptitude in fields previously unexplored, and the market has responded in kind. But be sure that gains made on short term, early-stage successes can disappear just as quickly as they came about. Therefore, until Musk's companies get further along in executing the vision, expect some serious volatility. Though with that volatility, expect some serious opportunity. There is a lot of money to be made between now and the day SolarCity starts making serious profits. If all the links in the chain stay strong and competitors do not swarm the empire, the upside is infinite. For now, the key for SolarCity investors is keeping abreast of company developments, competitors, and Musk's other ventures (Tesla and SpaceX). I will not spend time focusing on Tesla and SpaceX in this article, but I cannot understate their relevance to SolarCity's price movements. My focus will be on the value of SolarCity in and of itself, because at the end of the day, if SolarCity is not performing, the strength of Musk's other holdings will not be able to corral the company's failure. A strong Tesla will only buffett a weak SolarCity for so long. SolarCity will have to be strong on its own, so looking at the company independent of Musk's other holdings is important. A close look at SolarCity will reveal that it will perform its imperial duties with skill and integrity, and remain a strong link in the Musk chain.

Earlier in the year, SolarCity acquired Silevo. Silevo is an extra high conversion efficiency panel manufacturer. It was an excellent move.  Panel quality is the primary determinant of any solar company's success. Prior to being acquired, Silevo was in the process of creating a 200mw production facility in New York. Post acquisition, SolarCity announced the project would be expanded to 1gw. The move made SolarCity a vertically integrated company and threw them into another class of solar company. They are now on the same plane as SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR). SolarCity does not currently participate much in utility-scale projects like other vertically integrated players. This is to the detriment of SolarCity because utility-scale projects enjoy great margins. I think this disinvolvement is temporary. Right now they are focused on putting their imprint on the residential/commercial markets. Look for expansion into utility in the future, and expect it to be a major boon for the company. Having a gigawatt of their own panels to sell each year from their New York facility will give them a wealth of options. The demand for extra-high efficiency solar panels will only grow. Therefore expanding capacity is key. Current industry oversupply is a bit deceptive for two reasons: firstly, an oversupply of low quality panels has no bearing on SolarCity, second, the impending demand boom will quickly turn the supply surplus into a supply deficit. Because of this SolarCity is investing in expansion, and it will serve shareholders well.

[caption id="" align="aligncenter" width="640"] Residence with Silevo panels. Source: Cirelectric[/caption]

Much fuss has been made about SolarCity's financials; bears have focused on the lack of profitability, bulls on strong topline growth. Year over year, Q2 revenues are up ~61% and gross profits ~47%. Competitors SunPower and First Solar have been flat to negative. Growing revenues at such a strong clip while competitors are stagnating is beyond impressive. The problem is those numbers were far exceeded by operating expense growth (129%) and interest expense growth (138%). The result was a major net loss, a loss that built on last year's loss by a measure of 171%. The trend seems worrying. Instead of getting leaner, SolarCity looks to be getting more haphazard in the way they manage their money. Sure, they are in a massive growth phase, but so are other solar companies, and both  SunPower and First Solar turned profits. By taking a closer look at why SolarCity's expenses are outpacing revenue growth, we will be able to understand if the trend is actually problematic. The bulk of the expense growth came in the general/administrative and sales/marketing categories. These are very positive indicators. SolarCity is getting their name and product out there, laying the foundation for a bright future. Research expenses have had a ten-fold uptick from the same point last year. The figure is still relatively small relative the other two expense categories, but it is moving in the right direction. More importantly, as a whole, expense movements make it clear SolarCity is spending on development and growth and not losing money making mistakes. Paying a lot now to get the product out there will ensure major cash flows in the future. Hooking the customer early in a brand new industry will make all the difference in the world, just ask Microsoft. Investors should be cheering this sort of expense expansion.

Read more: Seeking Alpha: SolarCity Stands Strong Despite Unrelenting Pressure And Unwarranted Criticism

Source: DailyTech

Sandro Mijatovic | Oct 31, 2014