SunEdison Stock a Sell Despite Its New Strategy (SUNE)

Layoffs and a major strategic shift in business might be the best thing for SunEdison (SUNE), but with SUNE stock tanking a day after announcing these latest developments, the market might be saying they’re not enough.

suneTo recap: SUNE said Wednesday it doesn’t expect to sell any projects to two of its own affiliates after they lost more than half their value. SunEdison said it will also cut 1,000 jobs as part of a restructuring.

The market’s initial reaction was one of jubilation, sending SUNE stock up sharply Wednesday. But given a day to digest the implications of this shift at the world’s biggest developer of renewable-energy power plants, investor started to bolt again.

Indeed, SUNE followed Wednesday’s big rally with a steep gap down at the opening bell. That’s the sort of roller coaster trading anyone holding SUNE knows too well.

The once high-flying stock was sitting on a YTD gain of as much as 65% halfway through the year. It’s now off more than 50% for 2015, and SUNE’s change of course is by no means a guarantee of success.

True, SUNE may have no choice but to make some dramatic moves, but abandoning the so-called yieldco model that been central to its strategy has plenty of its own risks.

SUNE Affiliates Leave it Holding the Bag

In the last year-and-a-half, SUNE CEO Ahmad Chatila created two publicly traded utilities — TerraForm Power (TERP) and TerraForm Global (GLBL) — to buy solar and wind farms from SunEdison. These affiliates are known as yieldcos because, as utilities, they can be counted on for a steady stream of dividend payments.

But cracks appeared in the yieldco model when TERP and GLBL lost half their market values, in part because utilities don’t fare well when the market is expecting interest rates to rise. Under such pressure, the yieldcos are in no position to purchase projects from SUNE.

And so SUNE has essentially given up on the yieldcos as customers through the next year (at the least.) SUNE will “pivot to third-party sales,” and if no outside buyers can be found, the company will hold the projects on its balance sheet.

The market was right to applaud the strategic shift — SUNE had to do something drastic — but it’s far from a magic wand.

And it sure doesn’t do much good for near-term growth. SunEdison was counting on installations to double next year, hitting as much as 4,500 megawatts. On a conference call with analysts Wednesday, the company cut that projection to a range of 3,300 megawatts to 3,700 megawatts.

To be fair, SUNE confronted reality with its stumbling affiliates and put the bad news behind it. It’s also serious about slashing costs.

But the bottom line is that SUNE stock remains a highly speculative bet. With no sign of profitability on the horizon and current-year revenue in steep decline, there’s nothing for risk-averse or value investors here.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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