Investment Highlights

*Largest Residential Solar PV Installer: *In less than three years, SolarCity has emerged as the largest installer of residential solar PV systems in the US, allowing the company to realize scale of economies in an industry notorious for low margins.

*Lower Module Prices Should Help Profitability: *Prices for thin film solar panels, which account for over a third of the company’s COGS, are down over 50% since the peak in 2008.

*No Cap of Tax Credits: *In January, the US government removed the $2000 cap on federal tax credits. We believe this should make larger sized (and more profitable) installations more viable.

*SolarLease is a Competitive Advantage: *SolarCity offers a lease program, unique among the 700+ installers who compete primarily on price. For a product that costs $20 – $50k, we believe the competitive advantage of this lease option is significant, especially in a downturn.

Valuation:

Our valuation methodology suggests an exit valuation of $XX – $XX, or approximately $XX – $XX per common share vs. our previous estimate of $XX – $XX. The upward revision reflects higher revenue estimates due to higher adoption rate fuelled by lower panel prices.

Investment Concerns:

Lower Consumption and Higher Supply of Electrical Power Could Reduce Economic
Attractiveness of Solar Option:Recent trends suggest household electricity consumption could be peaking as a result of more energy efficient lighting and appliances. In addition, the steep drop in the prices of natural gas and coal (which account for over 70% of electricity generation) adds the risk that utilities may lower prices for higher tiers.

*Cost Advantage of Thin Film Panels Has Narrowed with Plunging Polysilicon Prices: *With polysilicon prices plunging by over 70% since mid-2008 (Exhibit 1), the cost advantage of SolarCity’s thin film based panels (which accounted for 70% of installations) has narrowed to $0.50/watt down from $1.50 per watt last year. We note that the company does not enjoy a similar dominance for silicon based installations, where it competes with hundreds of other integrators.

*Razor Thin Margins Vulnerable to Swings in Component Prices: *The solar installation industry operates on low net margins of below 10%. Even large suppliers such as Akeena Solar are unprofitable. With such a tight cost structure, small fluctuations in a component cost could make an adverse impact on profitability. We note that it is not unusual for a particular component price to skyrocket – as evidenced by the sharp spike in polysilicon prices in recent years.