When SolarCity (SCTY) went public about a year ago, I was bullish on the company’s prospects. I liked the business model as well as the fact that legendary entrepreneur, Elon Musk — who also created PayPal and Tesla (TSLA) — was one of the co-founders. But I had no idea that SCTY stock would go on to clock a gain of 756%!
SCTY is a top provider of solar panels. To make things easy for consumers to sign-up, the company provides 20-year lease contracts, which are payable on a monthly basis. But SCTY has also leveraged its infrastructure to cater to corporate customers — including Walmart (WMT) and Intel (INTC) — that are looking to save money on energy.
Well, there seems to be no end to the enthusiasm from Wall Street. Today, an analyst at Deutsche Bank (DB) started coverage on SCTY stock with a “buy” recommendation and a price target of $90 — almost $15 above the stock’s current price.
The research report notes that SCTY still has only about 0.2% of overall market share. Yet based on current production plans, this could rise to about 1% by 2016, which would probably mean a nice boost for SCTY stock.
But the DB report also noted that the company is using a smart financing strategy — that is, issuing bonds that back the lease payments. With interest rates still relatively low, SCTY could lock-in a competitive cost structure, which should result in stronger margins.
Interestingly enough, the company even has plans to offer these bonds to individual investors. That means it will be possible to buy the securities from a website.
That’s cool stuff. But despite all this, investors should still show some caution. After all, it’s a pretty good bet that the mega gains are already gone. If anything, SCTY stock is priced for absolute perfection going forward, as the price-to-sales ratio is at an eye-popping 40X. Any bumps could mean major trouble.
And as seen with the company’s last earnings report, the the business can be lumpy, especially since the company does rely on corporate customers. But there are other potential issues, such as the erosion of tax credits. Oh, and there is also some tough competitors in the market like SunRun, which could make it tougher to grab market share.
In other words, investors are taking on some notable risks for a stock that has already soared.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.