Welcome to the public markets, SolarCity (NASDAQ:SCTY).
On news of its first quarterly report as public company, SCTY shares are off about 15% in Thursday’s trading.
If you’ve been following solar-related stocks for the past few years, that kind of big loss might feel par for the course. While things have been a little brighter as of late, the industry has been broadly hammered for some time, as shown in the table below:
|Company||Ticker||5-Yr. Avg. Annual Return||52-Week Return|
The causes are fairly well-known, but mostly revolved around Chinese companies pushing out a glut of panels — driving prices down — as well as lax demand and a heavy reliance on government subsidies.
SolarCity, a top installer of solar panels in the U.S., is different from typical solar companies, which focus mostly on building component technologies. So, investors shouldn’t automatically lump it in with these names.
However, this does not mean the company is immune from the issues of the solar industry, as evidenced by SCTY’s fourth-quarter report.
Revenues increased by 22% to $25.3 million, but the consensus was for $36.67 million. The bottom line wasn’t very good, either. Wall Street was already expecting a big adjusted loss of 44 cents per share, and SolarCity limboed under that number by losing 54 cents.
SolarCity has to spend huge amounts to build the infrastructure to deliver solar energy to its customers. However, the company has a creative model to finance the development — it allows customers to sign 15-year contracts that keep them from having to pay the upfront costs for the installation, which can easily top $30,000.
The wrinkle to the model: SolarCity sells the right to the cash flows to various funds, which results in large amounts of capital for the company to finance its infrastructure.
SCTY’s business model is likely to get more profitable over time. The cost of capital has been declining, and the company has seen ongoing cost savings because of improvements in the installation process.
So, SolarCity’s business gives bulls plenty to love, but can the company keep up its growth?
Well, based on its plans for megawatt deployment, it looks like there will be some deceleration over the next few years — something that prompted Needham & Co. analyst Y. Edwin Mok to downgrade the stock from “buy” to “hold.” SolarCity trades at an enterprise-value-to-sales ratio of about 13X, though, so many investors clearly still believe that the hyper-growth story is intact.
However, the solar industry is notorious for volatility, and SCTY should be no different. Sequestration will reduce SolarCity’s grants by $3.8 million, and there could be further deceleration should the government take away any more subsidies, such as the 30% tax credit for consumers that install solar systems.
With growth looking a bit dicey — and amid the continued uncertainty of government programs — it’s probably not a good time to jump into SolarCity right now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.