SolarCity Corp (SCTY) hasn’t been able to catch a break in 2016. SCTY stock has spent much of the year trending downward as funding concerns, low fossil fuel prices and the loss of lucrative tax credits have taken hold. And those clouds aren’t clearing anytime soon.
The hope and thought was always that even if SCTY wasn’t profitable, there would be plenty of installation growth backing shares. However, SolarCity’s latest earnings report, out Monday night, treated investors not only to a wider-than-expected loss, but a severe deficiency in its growth projections.
None of that paints a pretty picture for the the future of the nation’s largest solar installer.
Prior to SolarCity’s Q1 earnings report, SCTY stock was already down a whopping 55% this year. The latest results have SolarCity shares off another 20% in early Tuesday trading.
Here’s what shook investors:
A Big Headline Miss for SolarCity
The good news is that SolarCity had the third highest quarter of installations in its history, at 214 MW installed. That increase in installed wattage helped push up revenue to above analyst’s expectations.
The bad news is that big jump in sales didn’t actually translate into higher profits, and in fact, SCTY managed to report a much bigger loss than expected.
For the quarter, SolarCity reported an adjusted Q1 deficit of $2.56 per share, while analysts were looking for $2.32 per share in red ink. However, revenues of $123 million were 82% better year-over-year.
You never want to see a company lose more money despite booking more in sales.
But where it really got ugly for SCTY stock was guidance for the next quarter. The company now expects to report losses in the range of $2.70 to $2.80 per share. Not only is that well deeper than the year-ago period’s -$1.61 result, but it’s far short of the $2.13 per share loss that Wall Street was expecting.
And that will come on revenues of $135 million to $143 million — also a failure of estimates, which stand at $151 million.
SCTY Stock Feels the Nevada Heat
The cause of that huge loss was a big-time drop in installations. For the first quarter, newly booked installations were down about 150 MW. The reasons varied, but one major one isn’t going away — and that’s Nevada’s recent decision to kill net-metering.
The controversial practice allowed firms like SCTY and rival Sunrun Inc (RUN) to clip “extra” cash flows from the difference in retail and wholesale electricity prices.
With solar being able to stand on its own in terms of pricing without help in Nevada, the state’s public utility commission pulled the plug on the subsidy. As a result, the cash flows from its panels in the state weren’t as great as initially projected. With that in mind, SCTY walked away from the state and the roughly 20 MW of quarterly installation capacity it provided.
Unfortunately, other states — including California, Hawaii, Massachusetts and New Hampshire — are considering making similar changes, putting SolarCity in a bind. That will cost SCTY in the form of higher rates when it comes to securitizing future cash flows into bonds. (Remember: SCTY needs financing to survive.)
SolarCity apparently doesn’t believe it will be able to make up for the decline in MW booked in the first quarter.
No Profits and Smaller Growth
Investors are generally willing to put up with a lack of profitability as long as growth remains robust. Just ask Amazon.com, Inc. (AMZN) shareholders. And that was the thesis behind investing in SolarCity — they’ll keep installing panels, they’ll achieve scale, and eventually they’ll be able to turn a profit on that volume.
In a way, SCTY was looking to become the Wal-Mart Stores, Inc. (WMT) of solar installers.
But investors can only take so much.
The problem for SolarCity is that not only are the losses getting bigger than imagined, but the growth is starting to slip, and that means selling less and losing more. It doesn’t take a genius to figure out that this isn’t a recipe for long-term success, nor does it make for a viable business model.
It’s what has Jim Chanos short the company, it’s why SolarCity has struggled of late and it’s likely why SCTY stock is plunging this morning.
SolarCity has always had a profit problem, but not it has a growth one. The firm’s soft guidance very well could mark the beginning of the end for the solar installer.
If investors have any hope of SCTY stock making a rebound, the company will need to find cheap ways to deliver on growth and claw away at its losses.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
