SolarCity Corp (NASDAQ:SCTY) announced yesterday that it has acquired high-efficiency photovoltaic panel maker Silevo Inc for $200 million. The deal is primarily composed of stock. Silevo currently has the production capacity of just 32MW. But SolarCity said Tuesday that it will build one of the world’s largest panel manufacturing plants in New York. The company is currently in talks with New York officials. The San Mateo-based company is targeting 1GW capacity in the next two years.

SolarCity SCTY

SolarCity’s module manufacturing strategy is relatively flexible

SolarCity Corp (NASDAQ:SCTY) said it will build more and significantly larger plants in the next few years. The Elon Musk-led company’s decision to build large manufacturing plant may seem counter-intuitive to some because the market is already flooded with panels. But Goldman Sachs analysts Brian Lee, Thomas Daniels and Britt Boril said in a research note that the vertical integration into module manufacturing is yet another “positive strategic move to address potential supply issues” in the short to mid-term.

The acquisition of Silevo and SolarCity Corp (NASDAQ:SCTY)’s recent deal with Norway’s REC Solar to buy 100MW of panels position the company to cover a bigger portion of its module supply needs through non-tariff exposed capacity in 2015. Goldman Sachs believes that SolarCity’s module manufacturing strategy is quite flexible as third-party module sales are not in focus.

Silevo could give SolarCity a cost advantage over rivals

That means SolarCity Corp (NASDAQ:SCTY) is less focused on monetizing the manufacturing part of the value chain. The company is enabling its future growth trajectory on the MWs of modules. However, there are execution risks to this strategy given the startup nature of Silevo and limited disclosure around production costs. Moreover, funding higher R&D and new capex could increase expenses.

Anyway, Silevo has industry leading conversion metric of 21%, which is expected to rise to 24% in coming years. It could provide SolarCity Corp (NASDAQ:SCTY) future cost advantages over rivals with lower balance of system costs. Goldman Sachs maintains its Conviction List Buy rating on the stock with $92 price target.

SolarCity Corp (NASDAQ:SCTY) shares jumped 2.26% to $65.99 at 11:51 AM EDT on Wednesday.