SolarCity Corp (SCTY) has had a rough year. Shares of SCTY stock are down more than 60% from a year ago as the company has struggled to turn a profit. This quarter the renewable energy firm is planning to launch a new loan product that could turn things around, but the company is still riddled with uncertainty, making SCTY stock a very risky purchase.
One of the biggest challenges that SCTY investors face is that the firm is heavily dependent on government policies.
With this year being an election year, the direction of U.S. policy is very uncertain and a new administration that is less focused on renewable energy than Obama has been could slow SCTY’s progress.
Already, states like Nevada and Arizona are considering cutting the amount of money solar customers receive for selling excess energy back to the grid, something that would make installing solar panels much less cost effective and would stifle demand for SCTY.
If the cuts are approved, many worry that other states will follow suit, leaving solar companies in a difficult position — having to either reduce the cost to customers or watch demand for their offerings dwindle.
The Truth About SolarCity
Still, some say that fears regarding these regulatory issues are overdone and that SCTY stock’s bargain price tag represents a potentially lucrative opportunity. However, making money from SCTY stock depends on several very risky factors.
For one, SCTY is only barely keeping its head above water. The company’s free cash flow has never been positive and the firm has shown no signs of slowing down the amount of cash it burns each quarter.
SCTY’s debt-to-equity ratio is a staggering 310.47%, so arguments that the firm’s recent fundraising efforts will help ease worries about its balance sheet are far fetched. SCTY is going to need a lot of cash to clean up its financials enough to pass for a stable investment.
Another argument for SCTY is the fact that its suppliers are lowering prices, thus increasing SolarCity’s margins. SCTY’s Chinese producers have said that module prices will decline due to oversupply. Firms like Trina Solar Limited (ADR) (TSL) and Yingli Green Energy Holding Co Ltd (ADR) (YGE) are struggling to stay afloat, so they are willing to sell the panels for increasingly lower prices. However, on the flip side, these difficulties may be a telling sign of the future for the industry as a whole.
The only real positive that SolarCity has going for it right now is the introduction of a new loan product that could help SCTY turn things around.
At the moment, SolarCity allows homeowners who can’t afford to install solar panels to lease them and pay monthly, but a new product set to be launched this quarter will allow customers to buy and own the panels using a loan.
This method will make the panels cheaper and more desirable to homeowners, while also adding to SolarCity’s margins. The success of this product could be a huge step forward for SolarCity depending on how it is received.
Bottom Line on SCTY Stock
SCTY’s pricing for the loan product will be paramount, as it will determine whether competitors can undercut their costs and what kind of margins the firm will be able to generate.
While the new loans SolarCity will be offering could be an exciting step forward for the firm, right now the future is far too uncertain to consider a long-term position in SCTY. If the loans fall flat, SolarCity has very few convincing strategies to improve its balance sheet and SCTY stock is likely to continue declining.
For now, investors would be wise to hold off on SCTY and wait until more details about its loan program surface to make any moves.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.