Tech Trader: SolarCity Gives Light Year New Meaning
By Bill Alpert(FROM BARRON'S 3/10/14)
Even as the market rockets to the heavens,
some stocks make it look like
it's standing still. SolarCity is one of them.
Friday's closing price of $77.80 valued the San Mateo, Calif.-based
company at nearly $6.5 billion -- a 10-fold increase from the stock's initial
offering in 2012 and more than double its level when Barron's reported a dispute
over SolarCity's federal subsidies ("Dark Clouds Over SolarCity," Sept. 2,
Valuing SolarCity's stock (ticker: SCTY) is a challenge for bulls and
bears alike. The company puts some $30,000 worth of solar-power panels on a
homeowner's roof. The homeowner agrees to make lease payments for the next 20
years. So far, the upfront costs of those installations on tens of thousands of
homes have filled SolarCity's financial statements with losses and deeply
negative free cash flow. Even ignoring the negative earnings multiples, the
business trades at more than 20 times book value and around 50 times sales for
the last-reported 12 months.
is creating, says SolarCity. An investor should rather focus on the present
value of those decades of contracted lease payments, a number the company calls
its " retained value." At the end of 2013, SolarCity says its present value
measure topped $1 billion.
In a storied bull market, SolarCity's decades-long outlook makes it quite
a story stock. I worry that key aspects of its retained-value calculus rely on
assumptions that are too rosy. A surprisingly large hunk of that billion-dollar
calculation hinges on the company's belief that after 20 years, all of its
customers will renew their leases at nearly the same payment rate. That's an
optimistic belief in the afterlife of a 20-year old rig that the homeowner could
require SolarCity to remove at the company's expense. Solar technologies will
likely have improved by then, too.
Investors might also worry about the keenness of SolarCity's vision of its
finances decades from now, when it seems to be having trouble accounting for
last year. The company has twice delayed reporting results for the year ended
December 2013. In a press release last week, the company said it will have to
restate financials for the last couple of years, to reflect its misallocation of
expenses in a way that overstated gross profits but didn't affect reported cash
Another measure tallies the skepticism about SolarCity's outlook: Cranks
have sold short some 40% of its free-trading shares. The company isn't surprised
that some investors wonder at a $7 billion value (with debt) for an enterprise
that took in $83 million in lease payments in 2013.
"It's not an easy story to get your hands around," said investor relations
vice president Aaron Chew, whom loyal readers may remember from his prior job as
a brokerage-firm analyst of the solar-manufacturing sector ("Solar Outlook:
Cloudy," Sept. 27, 2010). In our Friday morning chat, he said investors who see
just $22 million in lease revenue for the December 2013 quarter should
remember that there is "visibility" on 120 quarters' worth of payments tied to
rooftop systems installed during that quarter.
Visibility out 120 quarters assumes 10 years of lease revenue after the
end of the initial 20-year lease, I noted.
Chew conceded that lease renewals are a source of uncertainty. But he said
solar photovoltaic assets have proven to have 40-to-50-year useful lives.
Customer renewals will depend on the level of electric-utility rates in 20
years. While SolarCity contracts will escalate lease rates a percentage point or
two each year, Chew said utility rates have risen at a faster pace lately. The
company's retained-value calculation assumes 100% of customers will re-up if
offered just a 10% discount from their lease-end rate.
You might not expect that quibbles over such distant events would much
affect the discounted present value. But lease renewals amount to at least
$4,000 of the $14,0000 in retained value that SolarCity ascribes to a
typical residential contract. That's partly because of the rather mild annual
discount of 6% that it applies to forecasted cash flows and partly because it
expects fatter profits during a renewal term. "It's every investor's right to
say they want to be more conservative in their assumptions," said Chew.
Let me stipulate here that SolarCity's story is one I want to like --
namely that we're in the early innings of a great expansion in distributed
generation of solar power. Its stock is a better destination for society's
capital than a new refinery or some mobile-gaming app. But while SolarCity's
corporate cousins over at Tesla Motors (TSLA) have delivered terrific
innovations in the Model S car -- under the leadership of Elon Musk, the fellow
who's also SolarCity's board chairman and 23% shareholder -- SolarCity is
basically a specialized finance company.
Our securities markets are supposed to hazard their way toward the truth,
but some crucial truths about this company's value won't be known by anyone for
many years. Uncertainty and risk are essential to investing, of course. That's
where 10-bagger gains come from -- not the purported genius of a particular
entrepreneur or stockpicker. But SolarCity pretends to present-value its entire
business 30 years into future. By that time -- I boldly predict -- most of its
managers, venture backers, bankers, and brokers will have long since collected
the rewards of their far-sightededness.
In the near term, SolarCity is hoping to report its 2013 results by March
18, along with the restatements that will show operating losses to have been
bigger than originally reported. But don't fear for the company's retained
value. That 30-year prediction is unchanged at $1.05 billion.
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Company Symbols: SCTY US83416T1007
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