When it comes to solar stocks, SolarCity (SCTY) is certainly the growth play in the space right now. Many of its larger rivals — such as First Solar (FSLR) or SunPower (SPWR) — have focused on the boring utility markets and have become more income plays via the creation of their yieldcos.
With SolarCity recounting its latest earnings report, investors now have the opportunity to see if some of the solar firm’s recent changes have actually made a difference in growing that user base, plus we’ll see how SolarCity is faring on the road to profitability.
Growth, Some Issues at SCTY
If investors were to focus solely on user growth and newly installed modules, then SCTY is completely rocking it. The solar company installed a record 189 megawatts of solar panels in the quarter, topping its own forecast and coming in almost 80% better than what it installed during the year-ago period. On top of that record installed capacity, SolarCity showed strong order bookings.
During the quarter, SCTY managed to sign agreements to install another 395 megawatts- an increase of 81% vs. a year ago. The vast bulk of those bookings were to residential customers and again, broke another company record.
All in all, SCTY is on track to install between 920 megawatts to 1 gigawatt worth of new solar systems this year, and it’s about a quarter of its way to its mid-2018 goal of having 1 million customers.
So, SCTY is certainly growing … though this growth is costing a pretty penny.
Operating costs at SolarCity jumped more than 80% for the quarter as it saw its marketing/sales expenses surge, as well as expenses related to operating its own panel factories — a business SCTY launched in 2014. These higher expenses, plus the fact that SCTY bears the upfront costs for the solar energy systems that it installs, led to another quarterly loss.
For the second quarter, SCTY managed to lose $22.4 million, or 23 cents a share. Excluding some items, SolarCity managed to lose $1.61 per share — 4 cents worse than analyst expectations, though still a better loss than the year-ago period.
SolarCity’s Partly Cloudy Outlook
The problem for SCTY (and its latest earnings continue to highlight this) isn’t growing its user base — it’s simply making money. SolarCity has bled red ink in five of the past six reports on a GAAP basis, and on an adjusted basis, it has performed in the red every quarter since coming public. Worse, those losses are deepening.
Analysts estimate that SolarCity will record a loss of $1.59 share (minus certain items) for the third quarter, and for the full year, SCTY should lose about $6.28 per share — after losing $3.88 in 2014. SCTY’s own estimates are even lower than what’s predicted by Wall Street.
And if that wasn’t enough, the long payback period on its installations — of about 20 to 30 years — means that SCTY must continue to rack up debt to fund its operations.
Yes, stocks can rise for years without making money — Amazon (AMZN), anyone? But there’s always the nagging question of just how long investors are willing to put up with growth without profits. (Especially when losses grow rather than receded.)
That question is more pressing considering that residential solar installation market is heating up. Last week, America’s second-biggest installer, Vivint Solar (VSLR), was bought out by solar major SunEdison (SUNE). You now have a very big fish — with great economies of scale — directly competing in SCTY’s backyard. Meanwhile, installer Sunrun filed to go public.
It’s hard not to love SolarCity’s growth metrics right now. The latest quarter was yet another record-setter for megawatts installed, backlog growth and new customers.
That’s the good news.
The bad news is that SolarCity continues to be unprofitable and will continue to be so for quite some time. And that makes SCTY stock a dangerous place to tread.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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