Wednesday, February 10, 2016

A Deeper Dive Into The SolarCity Debacle (SCTY)

"SolarCity Inferno Chars Sunrun, SunEdison, SunPower, First Solar"

From Barron's Tech Trader Daily (which is kinda funny as one of Chanos' arguments is "They aren't a tech stock"):
SolarCity Drops 25%: Raymond James Sees Present Value, Axiom Sees Unrealistic Outlook
Shares of of solar energy project contractor Solar City (SCTY) have recouped some ground from last night’s 33% sell-off, down merely a quarter of their value this morning, after the company yesterday afternoon reported Q4 revenue and profit that topped analysts’ expectations, but forecast a deeper-than-expected net loss for this quarter, citing a larger-than-normal decline in installations of systems this quarter.

The stock is at $20, down $6.35, at present.

The stock has, surprisingly perhaps, received one upgrade this morning, from Raymond James’s Pavel Molchanov, who raises his rating to Strong Buy from Outperform, writing that the stock is now below what he estimates for the “net present value” of the business — a level “which we never thought we’d see.”

Molchanov does, however, cut his price target to $60 from $75.

Molchanov insists the reported results show nothing fundamentally amiss with the business:

Similar to 3Q’s 2% shortfall, it’s obviously not a good headline, but the cause – purely operational delays at several (non-core) ground-mounted projects – is not a fundamental concern. Operating expenses rose 68% y/y, modestly faster than installation growth, though notably slowing from 3Q’s 2x increase. As always, GAAP EPS is not meaningful.
And the outlook shouldn’t be worth a 30% haircut, he writes:

Insofar as the market is unhappy with the guidance, the issue seems to be the 1Q outlook of 180 MW, a steeper-than-usual seasonal drop (including the loss of Nevada’s 24 MW). Again, not the ideal headline, but hardly worth a 30% sell-off, since the quarterly progression is always back-end-loaded. 
He writes that the stock has finally grown into its valuation, by shrinking:

Now, let’s look at NPV per watt. The current run-rate is near $1.65/watt, but what will it be in a year, or three years? […] While any forecast should be seen as nothing more than a guesstimate, we assume – mainly due to the aforementioned geographic diversification – that NPV per watt will decrease in 2017 and 2018. In the past, we used to ask the question: how long will it be before SolarCity grows into its current share price? Well, as of last night’s 30% after-hours sell-off in the stock, that question no longer applies. Put simply, for the first time in its three-plus years as a public company, SCTY shares are trading at a discount to the current NPV/share figure. That is to say, the stock is currently pricing in zero credit for any future expansion in NPV. In fact, the stock is not even fully pricing in the current NPV. As far as our target price, we readily admit – as we’ve done in the past – that any target is still somewhat arbitrary. 
Here’s Molchanov’s model of net present value:...

...On the other hand, noted solar bear Gordon Johnson with Axiom Capital this morning reiterates a Sell rating, writing that Solar City is no longer an MLP-like, YieldCo.-like cash generator:

In summary, SCTY was once considered a growth company with all the benefits of a solar YieldCo vendor (i.e., perpetually low access to debt and capital costs). Yet, with both its cost of capital and cost of debt higher, exacerbated by the fact that YieldCos have completely fallen out of favor with long-only funds, investors appear to be now evaluating SCTY on its present-day fundamentals, versus a set of expectations 20-to-30 years out into the future previously (the lion’s share of investors value SCTY using a 30 year discounted-cash-flow [DCF] model, which assumes share buy-backs, escalators, etc.)....MORE