SolarCity: Timing Is Everything For This IPO

When the stock market is going up, there are always initial public offerings (IPOs). Timing, as they say, is everything.

But with a meaningful trend (like the stock market breakout experienced this year), you can make good money speculating in IPOs, even if you can’t get an allocation on the hottest deals.

One small, but fast-growing company that’s been a hot performer is SolarCity Corporation (SCTY) out of San Mateo, California. It’s been one of the best-performing IPOs since listing. The company’s timing could not have been more perfect.

This business is more than just a solar panel company. It is a full service installer and repair service company that guarantees electricity production to customers.

With net proceeds of approximately $95.0 million from the sale of approximately 13.2 million shares at $8.00 per share, this growing company is in full expansion mode.

It has also had fantastic stock market success so far, and it’s worth keeping an eye on (especially since Elon Musk from Tesla Motors, Inc. (TSLA) is the company’s chairman).

Before listing, the company raised over $100 million in private equity to fund its growth. The company has a burgeoning customer base among large corporations and the U.S. Armed Forces.

By May, $8.00 a share quickly became $50.00 a share, which isn’t bad for six months’ work. Extreme overvaluation is part of the game with IPOs, especially the ones that become immediately successful right after listing. (See “How Peter Lynch Got It Right 20 Years Ago.”)

Extreme price momentum with IPOs is very much a stock market reality when the key stock indices are ticking higher. The market bids the shares to astronomical levels in anticipation of the company delivering on growth. In a rising market, it definitely pays to research new IPOs.

SolarCity’s stock chart is featured below:

In terms of its business model, SolarCity generates a considerable portion of its revenues through the leasing of its solar energy systems with power purchase agreements. What’s great about leasing is that it requires long-term contracts (typically 20 years according to the company’s form 10-Q) and provides a recurring revenue stream.

Before listing on the stock market, the company used to just sell its solar energy systems on an outright purchase basis. The company began offering leasing and power purchase agreements in mid-2008; this boosted the company’s business considerably.

The majority of residential energy customers enter into leasing arrangements, while commercial and government customers enter into power purchase agreements. The company’s total customer base grew 14% to 57,416 as of March 31, 2013, up from 50,532 on December 31, 2012.

In the three months ended March 31, 2013, SolarCity’s total revenues were about $30.0 million, of which $15.1 million was due to operating leases. This compares to total revenues of $24.8 million, of which $8.14 million was operating leases, on December 31, 2012.

Without question, SolarCity’s stock market valuation is off the charts and the company isn’t even profitable. IPOs like this are as much about the concept as they are the business.

SolarCity is just the kind of company that can help revitalize the U.S. economy. The company is hiring, it’s expanding across the U.S. market, and Wall Street loves the idea of it.

Stock market IPOs are typically overpriced, but that doesn’t mean they can’t make money. And SolarCity just might be the perfect example of this.

Disclaimer: Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. The opinions in this e-newsletter are just that, opinions of the authors. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose.

Original post