Hop into the time machine with me and travel back about five years. At that time, SolarCity was the residential and small-commercial solar installer. The firm continued to rack up plenty of clients and was seen as the next big thing. Unfortunately, thanks to the constant need for funding, rising debt costs and new competition, SolarCity ran into some serious issues. Racing towards insolvency, the solar firm received a big buyout from Elon Musk and Tesla (NASDAQ:TSLA) stock. And in the years since the 2016 rescue plan, investors have sort of forgotten about SolarCity and Tesla’s solar operations. Heck, Tesla management didn’t even mention “solar” on its last conference call.
But thanks to a series of tweets from Musk, TSLA and its solar plans are once back into the spotlight.
Don’t be fooled. TSLA stock and its assets picked up from SolarCity are a disaster and they continue to be a huge drain on the firm. The reality is, the buyout of SolarCity was simply a bailout — and one that won’t bear any fruit for investors.
TSLA Struggles in Solar
SolarCity was supposed to be a jewel in Musk’s crown. The idea was that Tesla would transform itself into a total green-energy company — supplying vehicles, solar panels and battery storage solutions to take consumers off the ground and away from fossil fuels. On the surface, that was a great plan. When TSLA picked up SolarCity (which had Musk as its chairman) back in 2016 for $2.6 billion, the firm was the top solar installer. At its peak, SolarCity was installing more than 200 megawatts worth of solar panels per quarter.
And then the clouds came.
Thanks to its constant need for creative funding to get those panels into consumers’ hands, rising competition from smaller installers like Sunrun (NASDAQ:RUN) and Vivint Solar (NYSE:VSLR), as well as dwindling subsidies for solar panels, SolarCity hit hard times. Under the TSLA umbrella, the clouds have only gotten thicker. These days, SolarCity and Tesla’s solar ambitions seem to be running on life support — with newly installed wattage dropping like a stone.
During its last reported quarter, Tesla installed just 29 megawatts worth of solar panels. That’s lower than the 47 megawatts it installed during the first quarter of the year and lower than the 73 megawatts installed during the fourth quarter of 2018. Looking out further, that’s a 65% drop year-over-year and nearly 90% plunge from its all-time quarterly installation record of 258 megawatts.
To make matters worse, Tesla stock has seen its solar installations drop while rivals have actually seen steady numbers or even increases to installed capacity. Taking a look at rivals, RUN managed to install more than 86 megawatts last reported quarter and SunPower (NASDAQ:SPWR) added 52 megawatts worth a capacity.
Tesla Tries to Reignite Solar
What really stinks is that TSLA has been trying hard to save the business. Tesla cut its prices down to just $2 per watt after accounting for tax benefits. It fired its door-to-door and store-based sales staff and moved to a strictly online model. It also ended its agreement with Home Depot (NYSE:HD) to market panels. And speaking of those panels, Tesla now offers basic and standardized systems. Those solar roof tiles that Musk promised right after snagging SolarCity have failed to come to fruition.
Meanwhile, Musk is doing what he does best — acting like P.T. Barnum and throwing out hope.
After management basically forgot to mention solar on their last conference call, Musk sent out a series of tweets talking about ramping up production. Tesla hopes to turn out about 1,000 solar roofs per week by the end of this year. For TSLA stock bulls, this was great news. The once-mighty solar stock was coming back.
And yet, analysts peg that production as impossible given the low adoption rate so far and the fact that it hasn’t even completed its Gigafactory 2 in Buffalo yet. That plant was specifically designed for its solar roof project. So far, despite being around for nearly three years or so and collecting numerous customer deposits, Greentech Media reports that TSLA has connected just a dozen solar-integrated roofs to the grid.
Debt Is the Real Issue
The original idea behind the acquisition of SolarCity was that the integration of solar assets would help spur its storage and vehicle sales. By offering an all-in-one package, Tesla would be a total green energy firm. Unfortunately, that bill of goods hasn’t happened, as evident by still-declining solar sales.
However, TSLA did get something for its troubles — a ton of debt.
SolarCity’s business model basically ran on debt in order to make it work. That pumped it full of various convertible bonds, solar bonds, senior loans and other asset-backed securities. That huge debt burden was one of the main reasons why TSLA swallowed the firm in the first place. Today, that legacy debt from SolarCity makes up around one-third of Tesla’s overall debt outstanding. Moreover, that debt continues to weaken the electric vehicle manufacturer’s position.
While in recent quarters the growth in its auto operations have lessened the impact of the solar debt, Tesla still needs to raise money to finance expansion on the vehicle side. With such a huge noose around its neck, that could become complicated. During the spring, S&P Global Ratings highlighted this fact and put Tesla on a negative credit watch — highlighting SolarCity’s impact on the firm’s credit situation.
TSLA Stock Is Still a Risky Play
When Tesla first bought SolarCity, I was skeptical of adding the solar firm’s operations into the vehicle makers umbrella. Turns out that might have been the right call. Deterioration of those assets have only quickened pace, while the debt has continued to harm TSLA’s position.
In the end, Musk and Tesla’s recent moves to hype the solar business most likely won’t bear serious fruit and should follow the pattern of over-promising and under-delivering. Solar is a rock around the firm’s neck and should continue to be so. TSLA stock remains a risky trade and nothing more.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
