Thursday was a pre-Halloween nightmare for solar power company SolarCity (SCTY).
Investors howled at the company’s third-quarter results and could well scream again on Friday after the company said it would trim its growth plans and focus on cutting cost over the next several quarters in a bid to make some money in 2016.
SolarCity, which markets solar-panel systems for installation on homes and commercial buildings, had been a stock-market darling until mid-2014 because it was growing so rapidly and because Tesla Motors (TSLA) CEO Elon Musk was its board chairman and largest shareholder.
The shares have been falling for more than a year, and, on Thursday, the company conceded it was growing way too quickly.
Investors reacted swiftly and brutally: SCTY shares fell 16.9% after hours to $31.63 from a regular close of $38.07, down 27 cents. Potential buyers would probably do well to wait until the stock shows signs of real bottoming, possibly around $28.
SolarCity’s shares are down about 44% from Dec. 31 and down 66% from their all-time high of $88.35, reached on Feb. 26, 2014.
Musk’s 22% stake dropped in value from nearly $798 million, based on Wednesday’s close of $34.35, to about $690 million.
SolarCity Earnings Numbers
The company’s third-quarter revenue of $113.9 million was nearly double the revenue in the 2014 third quarter and beat the Street estimates of $111.4 million. But the big problem was profits — or lack thereof.
SCTY’s adjusted loss of $234.2 million was much worse than a year ago’s loss of $70.1 million.
On an adjusted basis, the loss came to $2.10 a share compared with a loss of 19 cents a year ago and larger than the loss of $1.95 a share analysts had expected.
SolarCity’s goal now is to become cash-flow positive by the end of 2016, CEO Lyndon Rive said during the company’s conference call. Cash flow is watched closely by many investors because it is so strong a barometer of financial health.
To get there will require trimming sales growth from 90%-plus a year to 40%. That would let the company concentrate on landing the most qualified customers, Brad Buss, chief financial officer, said during the conference call.
Becoming cash-flow positive also will require substantial cost-cutting, although the company did not offer details.
The challenges appear daunting: Cash flow from operations in the third quarter was -$214.4 million, down from -$22.5 million a year ago, according to the company’s letter to shareholders.
But during the quarter, SolarCity had plenty of cash to operate with — it successfully raised $327 million in long-term debt, $119.8 million in long-term notes and nearly $326 million through investment funds, the shareholders letter said.
Looking Ahead
The investment funds have been an important piece of the company’s strategy, which emphasizes putting solar systems on homes and businesses as opposed to running farms of solar collectors that sell electricity to utilities.
In Solar City’s case, investors put up cash to finance the installation of solar systems and, in return, collect the earnings and the 30% investment tax credit that solar systems qualify for under U.S. tax law.
The tax credit drops to 10% in 2017 and may expire after that. (The company hopes it doesn’t happen.) So, the company wants to prove it can operate profitably now.
For the fourth quarter, the company expects to install systems with a total capacity of 280 to 300 megawatts. For 2015, it sees installing between 878 and 898 megawatts, down from a July forecast of 920 to 1000 megawatts.
Fourth-quarter revenue, projected at $100 million to $108 million, would be up 48% from a year ago.
SolarCity has about 298,000 customers, after adding 35,535 new customer in the quarter.
Founded in 2006, SolarCity went public at $8 in December 2012 but has never earned a profit as it concentrated on rapid revenue growth. It uses cash from bond and stock sales and the investor funds to finance its operations.
More recently, SolarCity has been selling systems directly to property owners for cash or with long-term loans.
Market Scrutiny of SCTY Stock
SCTY stock has been followed avidly in part because of the presence of Tesla’s Elon Musk. He is the cousin of Lyndon Rive and his brother Peter Rive, SolarCity’s chief technology officer.
SCTY is also among the most heavily shorted stocks, with some 44% of its public float (what you can easily buy and sell) controlled by short-sellers, especially speculator Jim Chanos.
On Aug. 21, Chanos charged that the leasing arrangements and loans to customers were as risky as subprime mortgages, which nearly sank the U.S. financial system in 2008. The company said it finances only the most qualified customers.
SCTY promptly dropped 10%. Three days later, Musk bought more than 125,000 shares to support the stock.
Interest in solar energy soars and sags with the price of oil. Crude oil is down more than 57% from the 2014 peak of $107.95 a barrel and 68% below the 2008 peak of $145.31.
As the investment tax credit shows, SolarCity takes advantage of government help. In addition, the state of New York is building a $750-million plant outside Buffalo, N.Y., to make solar panels. The company expects to start operations next year.
The big question for investors is if SolarCity can show a clear path to getting along without taxpayers’ help. That could mean continued pressure on SCTY shares.
As of this writing, Charley Blaine did not hold shares of any of the aforementioned stocks.
