Alternative Energy Investor Discussions

[fjm9898]

i woundnt bet on it.

 

[drinkerofkoolaid]

I'll try sharing what I know though I have to admit it's limited. The specifics of SCTY's business model are somewhat confusing to me, though I get the gist of it. Prior to IPO I was really trying to wrap my head around how they're valuing leases, payments, etc and how to value the company but couldn't really figure it out. I became confident in the leadership and overall growth trajectory but confused about the specifics on how to model their valuation over time. I remember analysts were having a difficult time coming up with SCTY valuation as well around the IPO. Anyway, I eventually pulled the trigger (cost basis $14.50) mainly because the stock was rising and I didn't want an opportunity to invest in an Elon company get away (and Elon during pre-IPO had said that $13-15 for SCTY was a fair value for investors).

You're forgetting to account for Solar City being able to write off the depreciation of the Solar Systems being leased.

Solar City has a contract with the DOD to install Solar systems on 120,000 Military homes. Getting to 1 million may be easier than it looks.

http://www.solarcity.com/pressreleases/104/SolarCity-and-Bank-of-America-Merrill-Lynch-Move-Forward-with-Project-SolarStrong--Expected-to-Build-More-than-$1-Billion-in-Solar-Projects.aspx

 

[sleepyhead]

Yeah. Red days for us atm. Lets hope Renesola can do what the others couldnt.

I thought that JKS already had blowout earnings and yet the stock started up like 15% to finish only 4% ahead. I don't know what to say other than the market is still pricing these companies like they are going to fail. Buy and hold is the only way your are going to beat the market with these stocks.

Renesola might be another sell the news event; although I am hoping for the opposite.

 

[DaveT]

Hey sleepy, buran, koolaid and others. Thanks for the feedback on my earlier post. I'll give some time later to read and reply. Right now I've focused all my time/energy on the TSLA dip.

 

[Norse]

I thought that JKS already had blowout earnings and yet the stock started up like 15% to finish only 4% ahead. I don't know what to say other than the market is still pricing these companies like they are going to fail. Buy and hold is the only way your are going to beat the market with these stocks.

Renesola might be another sell the news event; although I am hoping for the opposite.

Well all my august calls went straight to hell now as they are gonna have ER on the 30th instead.

 

[fjm9898]

CSIQ announced offering of common shares.
Whole of the solar market is down about 7%

 

[CyberDutchie]

Thanks for the detailed posts, DaveT and sleepyhead, providing some good insights and opinions. However, I think everyone here is extremely disappointed with the turn of events in solar lately. After sleepyhead made his case for SPWR on this thread and drummed up support for other solar stocks like SOL, CSIQ, etc. many (including me) bought into the rosie scenario that was painted several weeks ago and expanded our portfolios with stocks or options in these other player, expecting big gains after earnings. Heck, even the term 10-bagger was dropped a few times.

Boy, what a back down to earth into reality experience this has been! Now my question is: what to do with the CSIQ and SPWR calls options that expire come Jan '14. CSIQ strike $14, SPWR strike $17. Sell at a loss but at least get some of my money back, or let it sit in the hope they recover? They very well could expire worthlessly if current trends continue... Any advise is appreciated.

 

[Norse]

Thanks for the detailed posts, DaveT and sleepyhead, providing some good insights and opinions. However, I think everyone here is extremely disappointed with the turn of events in solar lately. After sleepyhead made his case for SPWR on this thread and drummed up support for other solar stocks like SOL, CSIQ, etc. many (including me) bought into the rosie scenario that was painted several weeks ago and expanded our portfolios with stocks or options in these other player, expecting big gains after earnings. Heck, even the term 10-bagger was dropped a few times.

Boy, what a back down to earth into reality experience this has been! Now my question is: what to do with the CSIQ and SPWR calls options that expire come Jan '14. CSIQ strike $14, SPWR strike $17. Sell at a loss but at least get some of my money back, or let it sit in the hope they recover? They very well could expire worthlessly if current trends continue... Any advise is appreciated.

I have seen sleepy say atleast 50 times that it was big risk. Im a buyer for sure, just dont know when. Leaps or buying stocks is probably the best thing.

 

[Citizen-T]

This looks like a general "risk off" trade to me. All the high fliers are getting hit hard: TSLA, the solar stocks, the 3D printing stocks, CREE. These are all stocks that have enjoyed 100-300% gains YTD and now they are getting crushed. I think investors are getting worried about the overall market/economy and are taking cash out of risky names while they wait and see.

 

[fjm9898]

For you following CREE I just want to let you now that i bought into it this morning on some $100 Jan 2015 calls on the expectation of a recovery and then into next year a good amount of growth

Still debating grabbing up some more CSIQ at this highly dressed price tag.

Edit, looks like i missed CSIQ up 10% already.

 

[Norse]

Anyone what Obama will do for solar except for tweeting?

Anyway a good sign that Solar is beating the market.

 

[DaveT]

1. Retained value per residential customer can be easily calculated by using the average system size (I am sure they provide this somewhere - Sunpower does and theirs is about 8.5 kW) and multiply it by $1.27/W value that SCTY provided. SPWR has better panels so their retained value is $1.75/W. Therefore SPWR's retained value is close to $15,000 per residential customer.

I'm kind of curious how they come up with the $1.27/W (or $1.75/W for SPWR) retained value. In other words, what's their formula and what are the factors that might change the retained value calculations?

I think I might have found the answer: http://files.shareholder.com/downlo...3ef/Roth Presentation FOR FINAL REVIEW v4.pdf

“Retained Value under Energy Contract” represents the forecasted net present value of Nominal Contracted Payments Remaining and estimated performance-based incentives allocated to us, net of amounts we are obligated to distribute to our fund investors, upfront rebates, depreciation, renewable energy certificates, solar renewable energy certificates and estimated operations and maintenance, insurance, administrative and inverter replacement costs. This metric includes Energy Contracts for solar energy systems deployed and in Backlog.

“Retained Value Renewal” represents the forecasted net present value of the payments SolarCity would receive upon Energy Contract renewal through a total term of 30 years, assuming all Energy Contracts are renewed at a rate equal to 90% of the contractual rate in effect at expiration of the initial term. This metric is net of estimated operations and maintenance, insurance, administrative and inverter replacement costs. This metric includes Energy Contracts for solar energy systems deployed and in Backlog.

Cumulative Retained Value as of December 31, 2012
Total Retained Value* - $502m
Retained Value Under Energy Contract - $259m
Retained Value Renewal - $243m
Total Retained Value $/watt* - $1.18/watt

That said, I still don't understand the concept of retained value. Nobody is going to want to keep the old panels on their roofs since there will be newer technology by then and people will want new panels (or whatever is popular 20 years from now) and will sign a new lease if necessary; kind of like upgrading your phone. I can see some people willing to keep their old systems, since they can go month to month or maybe get a discount.

I think I remember Elon mentioning this in a video interview but he said that the old solar systems in 20 years on roofs would be worth a lot because in his opinion the panels are very robust and can last 30 to 40 years (or more). So, basically he doesn't see the need for a lot of maintenance, repair or replacement. Further, Elon views the panels as a commodity item that will approach closer and closer to the cost of the raw materials (with markup for the commodity producer). Thus, new panels will cost significantly less in 20 years than now, if the panels on the old systems need replacement.

However, most of the solar panels on old systems will likely do just fine and there probably won't be a need for replacement. Since the energy needs to the household are being met with the current panels, they will likely be met with the same amount of panels unless there is severe degradation or if the household needs change. In both circumstances, it will probably be easier just to add some new panels to the existing system and leave the old ones alone.

3. I have heard of one company that gave customers in Arizona, that previously signed contracts but do not have panels installed yet, the option to back out of the deal because of the new push to remove or heavily modify net metering policies. I think Colorado is also looking to modify net metering rules.

I don't know much on this, but it would appear the removal of net metering policies (along with expiring federal tax credits) could be a big, big challenge for the U.S. solar industry. I like SolarCity's management's response (ie., in conference calls) when asked about this. They reply that they're confident they're be able to keep up their growth (despite removal of net metering and expiring federal tax credits) because they have a plan to reduce costs as much or more than those expiring incentives.

4. PPA vs. Lease - this is just my guess, which could be completely wrong:

With a lease you promise to pay Solarcity $X per month for 20 years and Solarcity promises a minimum of Y Wh's produced and each year that Y value declines. If the panels produce above Y then the customer benefits from this and gets to keep the extra generation. If the panels produce under Y Wh's then solarcity has to make up the difference. This is a risk to SCTY, especially since these panels are not tested and could degrade a lot more than promised after 10 years or so, or the failure rate may be high.

With a PPA Solar City would offer the customer a set rate of $Z/Wh and then the customer would pay SCTY a monthly bill based on how many Wh's were produced during the month times. This is a better model than lease, because with lease the customer keeps the upside while SCTY is exposed to the downside. With PPA SCTY is still exposed to the downside, but gets to keep the upside.

That makes sense. It looks like they've been promoting PPA more of late to their residential customers. I definitely would like to know the % leases and % PPA and from SCTY's business model how they differ.

I found part of the answer on slide 7 of this pdf (http://files.shareholder.com/downloads/AMDA-14LQRE/2353825079x0x664578/add6218d-90ec-4089-9094-4259533d473e/SCTY_Investor_Presentation_-_May_2013.pdf)
"Roughly 45% of Installed Base of Operating Lease Contracts Are PPAs that Are Variable Based on Production, While Around 55% Are Leases Based on Fixed Monthly Payments."

5. I still don't know how to value SCTY and if their growth path is even sustainable. This sounds like a very capital intensive business with very little payoff in initial years. If financing dries up, state laws change, there is a panel shortage (I know it sounds crazy today), or other business models pop up then Solar City can get hurt. I am not saying any of this will happen, but to me it sounds like SCTY's business model will not fare well in a recession.

I do agree that a lot of their business model depends on their ability to secure financing. If financing dries up, their whole current business model goes down the drain. However, I have confidence because people (ie., funds/institutions) always need "safe" place to keep their money and grow faster than the pace of inflation. SCTY has been trying to create a new type of asset class with their 20-year solar funds. They're claiming that default rates are super low because people pay for their electricity even before paying their mortgage, because w/o electricity they can't function in the house. I think there's some validity to this.

Also, the beginning is usually the most difficult time to attract financing, and SCTY seems to have passed the early test. The more funds they raise, the easier it will likely get as they have more evidence of past successes.

If there's a recession, safer asset classes usually do quite well, so it's possible that it won't affect their funds… unless it's a severe recession and financing around the world dries up (ie., 2008).

6. I don't think that SCTY will get to 10 million homes, because there is only like 70 million homes (off the top of my head, so I might be wrong on this) total in the US. I highly doubt that they reach that amount any time soon if ever. This would require a lot of favorable law changes to get this kind of demand. I live in Texas and there is no incentive to put panels up even though we are at the risk of facing several rolling blackouts per year, starting in a couple of years due to inevitable capacity shortage from growing demand. Hopefully the politicians get their heads out of their asses but I doubt they ever will.

On page 6 (http://files.shareholder.com/downlo...3ef/Roth Presentation FOR FINAL REVIEW v4.pdf), there's claiming an addressable market of 45mm buildings. I'm assuming that's both residential and commercial. And they're saying, "The addressable market expands as retail electricity costs increase and installation costs decline."

Currently, I think SCTY is in 10 states (so they're forecasting their addressable market in those 10 states to be 45mm buildings). And they're also predicting retail electricity costs to increase (and also their costs to decrease), thus they're anticipating that total addressable market to grow over the coming years.

7. There is (IMO very reasonable) backlash from the utility industry that people with solar panels are being unfairly subsidized for transmission line use by those that don't have panels. I feel like this will allow utility companies to keep the status quo a little bit longer than necessary. Until at least battery technology is cheap enough to live completely off the grid at least.

I could see backlash from the utility industry. But also there's pressure on the state and federal levels for the governments to promote renewable energy production. It's probably reasonable to expect net metering privileges to be reduced but not completely removed.

I like SCTY's management approach as they see it as mainly a cost issue, where they need to reduce costs more than the potential cost increases of net metering removal and expiring federal tax credits.

On a side note, they've already started testing and deploying some Tesla battery storage systems in some of their systems. It's very limited right now because of cost. But over time, I can see this increase. I would imagine recycled Model S (and Gen III) battery cells would end up in Tesla battery storage systems for solar systems.

8. 1 million homes requires something like $30b in financing and that is a lot of money. Especially since the market made a huge deal out of the $500m they received from Goldman Sachs.

Yeah, $30b is a lot of money (relatively at least). There is a lot of money out there (ie., pension funds, university funds, companies, etc) and I think it'll come down to if SCTY can provide an attractive investment vehicle with good return and low risk. It'll be a challenge, but I think it's not out of the question.

When they raised $500m from Goldman recently, here was a quote I found interesting: (SolarCity and Goldman Sachs Create Largest U.S. Rooftop Solar Lease Financing Platform
)
“We are excited about the opportunity in distributed solar, which has the potential to both lower energy costs and create jobs,” said Stuart Bernstein, Global Head of Clean Technology and Renewables at Goldman Sachs. “Our firm has set a target of $40 billion in financings and investments in renewable energy over the next decade, and we believe SolarCity’s range of distributed solar solutions targeting a wider customer base will help us move toward a low carbon energy future.”

Overall, I think that there is a good chance that Solar City reaches a $10bn market cap, but the risks are a lot higher than with TSLA.

Here are some of my latest thoughts on valuation. I think with Solarcity it depends on a few things. First, if they can really reach 1mm customers in 5 years, I think their revenue growth will be off the charts. Probably at least 10-15x current revenue in 5 years. If that happens, then their market cap will likely respond with a large increase (though it's difficult to tell how much).

Another thought on valuation is there could be a tipping point where SCTY starts to appeal to funds/institutions and they start investing more money into the company. It looks like 28% of the float is owned by funds/institutions. If that significantly increases, then I can see SCTY's price significantly increase.

When I compare SCTY with other solar players, I think SCTY's advantage will/can be growth. I'm by no means an expert in solar, but from the 10 companies or so I did preliminary research on (ie., read annual reports, quarterly reports, etc), I haven't found another strong solar player that is on track and planning to grow revenue 10x in the next 5-7 years. If SCTY reaches a point (not sure when exactly that point will be) when it becomes more evident that they're on track to that 1mm customer goal, then I could see them launch into recognition as the solar industry's clear leader. When that happens, I can see funds/institutions start increasing their position in SCTY and SCTY's stock price respond.

There are still a ton of risks and most of them have to do with costs (ie., expiring federal tax credits, net metering, financing, etc). But what gives me some assurance is that I think SCTY has the right approach: they're religiously focused on driving down costs through an integrated approach. Slide 10 in this pdf (http://files.shareholder.com/downlo...3ef/Roth Presentation FOR FINAL REVIEW v4.pdf) shows how SCTY is looking at their competition (among solar companies). I think in terms of an integrated approach (sales, design, permits, financing, install, monitoring, repair, etc) SCTY is the clear leader. And I think if they're able to drive down costs the way they're planning (and secure the financing they need), then I think they're likely to extend their lead in the U.S. residential/commercial solar market.

 

[Norse]

Thank you for your thoughts DaveT.

Btw SCTY April Calls are available tomororw.

Also the white house has solar panel aswell!
http://www.fool.com/investing/general/2013/08/18/the-white-house-goes-solar.aspx

 

[serkol]

I'm kind of curious how they come up with the $1.27/W (or $1.75/W for SPWR) retained value. In other words, what's their formula and what are the factors that might change the retained value calculations?

I think I might have found the answer: http://files.shareholder.com/downlo...3ef/Roth Presentation FOR FINAL REVIEW v4.pdf

...

There are still a ton of risks and most of them have to do with costs (ie., expiring federal tax credits, net metering, financing, etc). But what gives me some assurance is that I think SCTY has the right approach: they're religiously focused on driving down costs through an integrated approach. Slide 10 in this pdf (http://files.shareholder.com/downlo...3ef/Roth Presentation FOR FINAL REVIEW v4.pdf) shows how SCTY is looking at their competition (among solar companies). I think in terms of an integrated approach (sales, design, permits, financing, install, monitoring, repair, etc) SCTY is the clear leader. And I think if they're able to drive down costs the way they're planning (and secure the financing they need), then I think they're likely to extend their lead in the U.S. residential/commercial solar market.

Thanks, DaveT! This cleared my head a lot!

 

[woof]

Thanks DaveT. There are two other revenue streams for SCTY that you may of missed (or I missed in your long post).

1. Solar Energy Credits. In several states the owners of Solar Panels can sell these credits on a somewhat open market to traditional power producers in order to meet their renewable quotas. Very similar to Tesla selling ZEV credits. In MA for example, these credits sell for about 25 cents/kWh generated, so not only does SCTY get paid by the homeowner per kWh, they also get paid by the sale of these credits. When I was negotiating with SCTY for the panels, I asked for a quote where I could get the the SRECs. I didn't expect them to allow that, but sure enough they came back with a quote for about double, meaning the credits were worth more to them over 20 years than the amount I was going to pre-pay for the panels!

2. Federal and State tax rebates/credits. As the owner of the panels, SCTY is entitled to lots of various tax credits. Somehow (and I admit I don't know how this is done), they can package these up and pass them on to their investors--or at least that was how the SolarCity rep. explained it to me when I asked. Not sure I believe this, just passing on what I was told.

 

[InTheShadows]

Thanks DaveT. There are two other revenue streams for SCTY that you may of missed (or I missed in your long post).

1. Solar Energy Credits. In several states the owners of Solar Panels can sell these credits on a somewhat open market to traditional power producers in order to meet their renewable quotas. Very similar to Tesla selling ZEV credits. In MA for example, these credits sell for about 25 cents/kWh generated, so not only does SCTY get paid by the homeowner per kWh, they also get paid by the sale of these credits. When I was negotiating with SCTY for the panels, I asked for a quote where I could get the the SRECs. I didn't expect them to allow that, but sure enough they came back with a quote for about double, meaning the credits were worth more to them over 20 years than the amount I was going to pre-pay for the panels!

2. Federal and State tax rebates/credits. As the owner of the panels, SCTY is entitled to lots of various tax credits. Somehow (and I admit I don't know how this is done), they can package these up and pass them on to their investors--or at least that was how the SolarCity rep. explained it to me when I asked. Not sure I believe this, just passing on what I was told.

The solar energy credits can be sold to anyone and they can only be sold once. The credit is the "green claim" one gets for making solar energy. I can sell my credits into the nnormal market and they would go to the power companies trying to meet their solar portfolio requirements. I could also make an agreement with a business down the street (or across the country) and then they could market that they are solar powered or x% solar powered and I could then no longer say I am solar powered. Solar energy credits drop in value in most markets over time which also has to be considered in those states. If cap and trade or carbon tax ever gets any traction then it is very likely that solar credits will have a value in those markets too (again only sellable once).

As for the tax benefits, the 30% tax credit goes to the lease holder, as well as accelerated depreciation (50% bonus this year then MACRS 5 year after). One way non profits get around the no tax benefits is that some investors can pool their money and form a LLC and create a lease or power purchase agreement between them and the non profit, then the LLC gets the tax benefits and its distributed to the share holders in the same percentage of their ownership (unless its drawn up some other way in the operating agreement).

 

[CyberDutchie]

Solar continues downward spiral, when is this thing gonna end? Sighhh...

 

[Gtoffo]

Solar continues downward spiral, when is this thing gonna end? Sighhh...

Yeah seriously, what is the cause of all this?

 

[sleepyhead]

This is the nature of investing in solar companies. I still stand by everything I wrote and the industry dynamics have not changed at all in the past couple of months. These stocks are highly volatile and there is still a lot of risk associated with investing in solar. If you believe in the industry and want to invest, then right now might be a good time to buy since these stocks are all down about 30% off their last month highs. If you are still unsure then wait a few more weeks, since the stocks can still go down another 20% or so.

The best way to invest would be to buy some now, then buy more as the stocks go down to dollar cost average. Buying options is probably too risky (even buying shares is too risky for most people), and I found out the hard way: I saw my portfolio triple within 2 months only to lose all of my gains one month later and now I am back to square one (in my options portfolio).

I am a buyer at these prices, by I understand that the correction may not be over and am ready to buy more if the share prices continue to go down.

Look ar CSIQ's chart for the past year to get a glimps of what investing in solar looks like:

Nov 15, 2012 - $2.03 share price
Feb 15, 2013 - $5.00, ~150% gain in just 3 months
March 11 - $3.15, ~37% loss in under a month
Aug 5 - $15.74, 5 bagger in less than 5 months (8 bagger since Nov 2012).
Aug 15 - $10.64, ~30% loss in just 8 trading days.


Using CSIQ further as an example, I would like to point out that according to finance.yahoo.com there are 4 analysts following this stock and the consensus 2014 EPS is $2.79 or a range of $1.75-$3.80. So the stock is currently trading at a 4x 2014 PE ratio. The last time I saw a stock trading at 4x PE was FSLR at $13 less than a year ago, which eventually became a 4 bagger in just a few months. I am not saying that this will happen to CSIQ, but it is an interesting risk/reward proposition. If it truly does have $2.79 EPS in 2014 then CSIQ has to trade at $30 at a minimum, unless of course 2015 is looking significantly worse.

It looks to me like the overall market is heading into a correction phase and if this drag continues then you may see solar stocks go down even further. But as long as the US economy continues to grow, along with EU continuing to come out of recession, and China doesn't slow down anymore; then we might have some good buying opportunities in solar. If we enter a bear market, then solar stocks will probably go down another 50% from here.

I wanted to point out that I started recommending most of these stocks in June when there prices were deflated, e.g.:

SPWR - I started recommending at $18 and eventually went up to $28.15. Still around $21 today
SOl - Started recommending at $3.14 after they pre announced earnings and it went up to $4.86 at one point. Still at $3.90 today.
CSIQ - Recommended at $12 and it reached $16.40, before coming down to $11 today.

If you want to make money in this sector then you have to buy when things are looking really bad, and sell when things are looking really good - this is psychologically very hard to do and requires a great deal of patience and discipline. Investing in this sector is not for the faint of heart. Today it is looking bad, tomorrow TSL has their earnings release and the whole sector may make a big move in one direction or the other.

The good news is that all of the US listed Chinese solar companies are still priced to fail and if they can become sustainably profitable over the next few years then you have multi-bagger potential returns. If they don't then you will lose half of the money you invested. These are "casino" stocks and you have to look at them as a highly leveraged play on the world economy.

I bought some solar today, but am worried that maybe I got in a little too early. I am ready to buy more later if prices continue to go down.

Almost all of the solar stocks are still up several hundred percent YTD even after their recent pullback. This means that there is still plenty of downside risk for these companies. But remember that the industry is in a lot better position today then it was at the beginning of the year, so they can't go down forever.

 

[CyberDutchie]

SPWR - I started recommending at $18 and eventually went up to $28.15. Still around $21 today
SOL - Started recommending at $3.14 after they pre announced earnings and it went up to $4.86 at one point. Still at $3.90 today.
CSIQ - Recommended at $12 and it reached $16.40, before coming down to $11 today.

SPWR - I started accumulating SPWR in late June: avg. cost basis at $21.45 and also got Jan '15 $17 call options at $6.10 (still green)
SOL - bought 3 weeks ago at $4.29 (down 12% as of today)
CSIQ - bought 2 weeks ago at $15 (down 27.5% as of today) and also got Jan '14 $14 calls at $3.40 (down 58% as of today).

If you want to make money in this sector then you have to buy when things are looking really bad, and sell when things are looking really good - this is psychologically very hard to do and requires a great deal of patience and discipline. Investing in this sector is not for the faint of heart.

So true. I'll probably average down as you suggest, and stay away from calls all together.

Thanks for your advice and insights. People say you should always do your own research, but no way I could get to the level of understanding that you have. Just keep reminding us of the volatility please.