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SunEdison is an attractive investment opportunity: by Jay Yoon March 11, 2015, 2:57 p.m.
Solar Is Cost Competitive Even Without Subsidies:
In general, I am very bullish on the overall solar sector. The cost of solar has declined to the point where it is competitive on a non-subsidized basis in many countries. Currently, solar is cheaper than retail electricity in approximately 30 countries. This includes some of the largest solar markets such as US, Japan and Germany. Other large countries, most notably China and India, are very close to grid parity.
Adoption of Solar Is Still At the Beginning Stages.
The overall penetration of solar is very low today (approximately 0.3% of global electricity generation). A small increase to 1% penetration will triple the market size. Thus, the solar industry is still at the beginning stages of a prolonged period of growth. The cost of solar will continue to decline going forward which will lead to the increased penetration of solar in many countries. For example, in the US, solar is currently cost competitive on a non-subsidized basis in 14 states. By 2016, this number is expected to increase to 47 states.
Leading Market Position.
SUNE is well-positioned to take advantage of the long-term growth in solar due to its leading market position. SUNE is currently the largest renewable energy provider in the world. In FY 2015, the Company expects to install between 2.1 – 2.3 GW of solar and wind projects. By comparison, SolarCity guided for between 920MW – 1 GW of deployments in FY 2015. SUNE’s competitive moat is significant. The Company’s scale and first-mover advantage provides them with project development expertise, access to capital and a broad network of relationships. SUNE also has a geographically diverse business which mitigates country-specific risk.
Differentiated Business Model.
SUNE has a differentiated and diverse business model. The Company entered the wind power market through their acquisition of First Wind. More recently, SUNE entered the energy storage business through its January acquisition of Solar Grid Storage. Thus, as a “one-stop-shop” provider of renewable energy services, SUNE has been able to differentiate itself from competitors.
Terraform and Future Yieldcos To Unlock Significant Value.
The formation of the Terraform Yieldco has allowed SUNE to retain the majority of its solar projects rather than selling them to a third party. The Company’s ROI from a retained project is significantly higher than the ROI realized from selling the project to a third party financial buyer. SUNE has announced its plans to form additional Yieldcos in the future, including an emerging markets Yieldco focused on projects in Africa and Asia. Terraform, along with the formation of future Yieldcos, will allow SUNE to maximize the value received from its solar and wind project developments.
Trading At A Large Discount to Fair Value.
SUNE shares are trading at a large discount to fair value. As I mentioned previously, the Company expects to install 2.1 – 2.3 GW of solar and wind projects in FY 2015. If SUNE sold these projects to a third party, I estimate that the Company would report ~$1.10 of EPS from its project development business. Comparable solar companies with a sizable project business trade at an earnings multiple of 25x or higher. For example, Sunpower currently trades at a multiple of near 30x FY 2015 earnings. Assuming a relatively conservative multiple of 20x FY 2015 EPS, I estimate SUNE’s project development business to be worth $22 per share. Thus, SUNE’s project development business by itself is almost worth the current share price. I estimate the remaining components of SUNE’s business (e.g. Terraform, Samsung JV, Semi business) to be worth an additional ~$15.00 per share. Putting it all together, I estimate that SUNE is worth $37 per share on a combined basis. This represents a 67% premium to the current share price of $22.17 (as of March 10th). Thus, I would recommend going long SUNE at the current price level.