Bears Could Face Wild Ride Betting Against SolarCity

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Short-selling in SolarCity (NASDAQ: SCTY) rose significantly shortly after the company went public on Dec. 12, 2012. Short-selling open interest increased 23-fold to 1.61 million shares by Dec. 31, well above the 67,800 shares on Dec. 14. SolarCity reached an all-time high at a price of $16.94 within a few trading sessions after 2013 began. Since pulling back to $15.50, should investors be betting against this solar energy systems company?

Background

SolarCity sells solar energy systems to residential and commercial customers. The company counts government entities as customers. The energy systems include both poly-crystalline silicon panels and string inverters. Thin film panels have also been installed.

SolarCity already installed its products to 31,641 customers as of the end of June 2012. SolarCity is unique: it provides evaluation services that identify household energy usage. When the analysis is complete, the company works with its customer to identify energy efficiency improvement options. SolarCity does not sell solar energy solutions alone: things like heating and cooling, insulation, duct sealing, and lighting are addressed.

SolarCity has 6 patents issued to it as of Aug. 31, 2012; 17 additional patents are under the application phase with the U.S. Patent and Trademark Office.

Related Companies

First Solar (NASDAQ: FSLR) has a high short-float in the same time period. By Dec. 31, 2012, short volume was 22.25 million shares. First Solar is valued at 7x forward earnings. Last year, the company lost $7.63 per share.

Electric car maker Tesla (NASDAQ: TSLA) also has a high short float of 26.8 million shares. SolarCity is the preferred charging station installer of Tesla Motors. According to a customer, "SolarCity did a fantastic job installing my EV charging station. They were professional, worked hard, cleaned up after themselves and made sure I was happy before they left. I would love to work with them again to install a solar system to offset the new electrical load of my Roadster. I will definitely recommend SolarCity to others."

Analyst Price Target

Underwriters unsurprisingly have bullish ratings on SolarCity. The target price ranges from $11 - 22:

Date

Firm

Rating

Target $

1/8/2013

Raymond James

Market Perform

N/A

1/7/2013

Needham & Company

Buy

17

1/7/2013

Goldman Sachs

Buy

18

1/7/2013

Credit Suisse

Outperform

22

1/7/2013

Roth Capital

Buy

20

1/7/2013

BofA/Merrill Lynch

Buy

21

12/14/2012

Maxim Group

Hold

11

Data Source: streetinsider

Fiscal 2012 Results

SolarCity reported deploying 156 megawatts, a 117% growth over the 72 megawatts (MW) deployed in 2011. 85 MW were deployments to residential customers, while 71 MW were to commercial customers.

In its S-1 filing (released prior to its IPO), the company generated revenue of $71.4 million in the first half of its fiscal year. This amounted to a loss of $48.9 million in earnings.

Fiscal 2013 Forecast

The company expects to deploy 250 MW for in fiscal 2013: 190 MW to residential and 60 MW to commercial deployments.

Analysis

Valuation

SolarCity has the leverage to ramp up sales: for little to no up-front costs, installations may be made for residential or commercial customers. Revenue is generated from long-term leases by selling electricity generated by the customers.

The company is currently valued with a market capitalization of $1.13 billion. With $0.67 in cash per share, SolarCity Is valued at 10-times its book value per share.

Risks

High Market Costs

As a newly-listed company on the market, SolarCity shares could invite speculators. Shares could rise significantly if the company reports triple-digit growth in megawatt deployment. What investors could have a hard time assessing is the quality of the revenue. Upfront marketing costs could also be high. On its website, home customers could get a $500 prepaid card by switching to SolarCity.

 

Lack of Earnings

Throughout its entire history, SolarCity has not made a profit. Revenue growth is impressive – in 2008 revenue was just $32 million – although losses are growing too.

Conclusion

SolarCity at first appeared to be a great contrarian play: the company’s growth depends on marketing, customer relations, integrated services, and a great product offering. On closer analysis, SolarCity does not appear likely to generate profit (GAAP).  In its S-1 filing, $1 billion is listed for systems leased, to be leased. This means that over a 20-year period, there will be $1 billion in payments will be received.  With a market capitalization exceeding $1 billion, investors are implying that the lease amount will grow quickly.

Short-sellers could be right in betting against the value of the company, but sentiment is positive for the solar energy sector at this time. If SolarCity can show revenue growth while costs decline, then the high valuation is justified. In the meantime, short-sellers could have the upper hand if they have the stomach for short-term rallies.


chrispycrunch has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure