Short-Term TSLA Price Movements - 2016

[Foghat]

Normally, when a corporation's unsecured bonds hit junk bond status (as 14% current yield for a 2 year bond certainly qualifies), they cannot raise any MORE money that way. Sure, SolarCity is only paying 2.75% for those bonds, but they come due in 2 years. That means Solarcity must pay the bondholders $200M in two years plus the $566M in the other bond maturing in three years. How will Solarcity raise that kind of cash? If things stay the way they are, they can't issue a new bond without paying 14% interest. And they don't happen to have $766M lying around.

Since these are bonds, not paying the principle when due effectively means automatic receivership - ie. common stock is worth nothing.

I mean, you don't have to know anything else about Solarcity than this (unless I'm missing something - I'm sure people will correct me if I'm wrong). Solarcity is obligated to pay $200M in 2 years, $566M in 3 years and the bond market is betting that that isn't a sure thing. Elon says they'll be cash flow positive end of this year. Will two years of cash flow be enough to pay off the bonds, or at least right the balance sheet enough so they can borrow again?

I don't know, but I do understand why people look at this deal and think it's a Solarcity bailout - their unsecured corporate bond yields show that.

BTW, Solarcity may have raised other money recently, but the money they raised was undoubtedly secured by PPAs or other assets. Again, I don't know if Solarcity can continue to raise enough money through securitization of their revenues, and probably neither does the bond market, hence the high yield on unsecured bonds (if their revenues fall off, there goes that funding avenue, for instance).

One last point - corporate bonds are normally bought and sold by sophisticated bond traders, bond funds, pension funds, etc. If a 2 year bond is trading at 14%, that is the best guess of really smart sophisticated investors of how shaky Solarcity is. They haven't written Solarcity off entirely (otherwise the yield would be 50% or more), but its getting close.

If I'm hearing you correctly, you are talking about the convertible bonds. These bonds can become shares at the determined share price is hit. So they may exercise this option.

Secondly, Solarcity in two years (2018) at the a minimum will have about 5-6gws of install base with ~$1bln in annual revenues of mostly 20 year monthly payment streams just off grandfathered net metering regime revenue, not to include the utiltiy level ppa revenue and the emerging grid services piece that will be in early stages then. Secondly they will continue to raise significant capital through tax equity and ABS funds, significantly bigger funds as well as they have a massive accumulating install base.

If you don't think they'll be able to honor these covenants just at the bare minimum constant 1gw/year install rate, then it's hard for me to see how you are honestly looking at this business soberly.

Key locked regulatory markets: California extended modified retail net metering to 2019 which is 50% of all installs currently only at 2-3% penetration of addressable market... Just California alone could carry Solarcity into the 2020's, let alone any of their other delivered energy markets included.

 

[Seesaw]

Foghat, you are mount a convincing argument. You have reduced my feelings from being against the merger to now being simply cautious yet optimistic.

I still have concerns around the sales model of multi level marketing and hard sales tactics, but this is not insurmountable. I also have concerns around the Tesla brand which is very powerful and associated with innovation, luxury and high levels of customer service, it should be protected and anything that comes under that brand should meet or exceed what we already have.

There may be advantages in keeping the SolarCity brand.

 

[Foghat]

Do SolarCity send out the power bills with the net difference, or is it the utility company?

I wonder as SolarCity gets more customers whether they could negotiate lower utility charges and pocket some of the difference or pass on the savings?

You get your locked in solar rate bill, then your utility bill separate. Sometimes it could be a $0 bill from your utility plus solar bill, sometimes it's more then $0 plus solar bill. In the end it depends on how much production your get out of your system, which will reflect in how low your combined utility bill over the course of each month during the year.

Solarcity aims to cut your total bill by 10% and more a year in total electricity savings.

If the system doesn't produce, you don't pay your solar bill.

 

[geneclean55]

Do we have any data on how quarterly car production compares to deliveries? Tried some searches but I'm coming up empty.

I'm trying to model Q2 performance, so it would be helpful to have past data on this disparity.

Did you end up with anything interesting on this?

 

[Foghat]

Foghat, you are mount a convincing argument. You have reduced my feelings from being against the merger to now being simply cautious yet optimistic.

I still have concerns around the sales model of multi level marketing and hard sales tactics, but this is not insurmountable. I also have concerns around the Tesla brand which is very powerful and associated with innovation, luxury and high levels of customer service, it should be protected and anything that comes under that brand should meet or exceed what we already have.

There may be advantages in keeping the SolarCity brand.

I think you are referring to the solar ambassador program, door to door cold selling, and then Home Depot/Best Buy lead generators. Yes, I've read about this in some Twitter comments and other internet comment sections, but for the most part, it has created unprecedented demand compared to any other solar company in the industry.

For example, one of their reps is actually rated the #1 salesman of any industry in the United States... And he does cold call door to door as his method of choice. It's pretty wild to learn that about this about Solarcity.

Their internet commercials are actually award winning and pretty cool. Check out the how your fossil fuel energy is made commercials. The "Ra" are a little out there, but for the life of me, I still can't believe they've received over 40 million views and counting.

I guess if the merger goes through they may have a branding issue to deal with, but not sure this will be a long term issue given that only 1% nationwide solar penetration at the moment.

My feeling is if they come out with a total package tesla designed solar system that has high end optionality, they could actually increase luxury profile while at the same time appeal to mass market. I think that luxury optionality is key. Some people might just want the most ultra sophisticated smart home as opposed to just saving money on home electricity. It is similar to base model s,X,3 beauty with the choice to upgrade to optional bells and whistles and highest tech power.

In the end the focus is creating baseline mass market product that most modest homeowner can afford and love(this includes business and utilities too!)

 

[HiTechRedneck]

The example that Elon gave is what I am currently going through. I am in the process of installing a Solar City solar installation through their loan program. From the start I told them I wanted to have the Tesla Powerwall as part of the the complete installation as it is shown as an option on the site so I would have everything done at once. They told me I couldn't buy it through them, but I could lease it, If I wanted to buy it I had to go through Tesla separately. It didn't make sense to me to own the panels and lease the battery so I told them I would just get the solar system installed and then buy the battery later.

Just so you know my positions. I do own Solar City stock and Tesla stock and made a reservation of the Model 3 sight unseen.

 

[Cosmacelf]

...one of their reps is actually rated the #1 salesman of any industry in the United States... And he does cold call door to door as his method of choice.

Love stories like this - Nice to hear that door to door selling isn't extinct!

 

[Perfectlogic]

If you don't think they'll be able to honor these covenants just at the bare minimum constant 1gw/year install rate, then it's hard for me to see how you are honestly looking at this business soberly.

I think you are way too confident on SCTY, a 1GW/year install rate is no way near a guarantee even with the easier funding that would come with a TSLA merger.

When thinking about the growth projection of SCTY it's important to note that new sales are of a different nature than sales in most other businesses, there are no repeat customers. I think it is very likely that installs will peak at some point and then go down, perhaps fast. There are low hanging customer fruit, the folks who like the idea of solar and buy into the leasing deal and people who doesn't, unless it gets significantly cheaper. The low hanging fruit is ripe for picking, but it can only be picked once, when these juicy fruits are all eaten it will be very hard for SCTY to satisfy their hunger.

This hard peak growth trajectory is playing out right now I think. SCTY wen't from a growth of 80% last year to only expecting 20% growth this year after lowering their yearly guidance last quarter by 16%!, only 1 quarter after issuing their previous guidance. I don't think it is a coincidence that we see the buyout now.

 

[dakh]

There's definitely an adoption S-curve but we're at the very very early part of it. Once your neighbor has these things on the roof chances are you're gonna get curious. Single digit percent is just the very beginning of a snowball, it's tiny.

 

[Perfectlogic]

There's definitely an adoption S-curve but we're at the very very early part of it. Once your neighbor has these things on the roof chances are you're gonna get curious. Single digit percent is just the very beginning of a snowball, it's tiny.

How can you say SCTYs growth will be an S-curve when their growth rate is falling off a cliff from 80% last year to 20% this year, the data is showing the complete opposite of what you are saying. I agree the growth of solar will be an S-curve but you shouldn't make the mistake of believing that residential solar will necessarily be a huge success just because utility scale will. Right now residential solar is more than twice as expensive as utility scale and it's not like the gap is closing quickly at all. Everything is just more inefficient with residential solar, from the efficiency of the panels being lower because of the tilt of the roof to the install being much more expensive naturally, to the soft cost being extremely high with a model like SCTYs.

The only advantage with residential solar is that if you didn't need the grid at all you could save all the distribution infrastructure, but this scenario is very far out in the future if it will even ever make sense as the amount of batteries and or diesel generators you would need would make it much more expensive than the grid solution we have today. The cost of distribution is also only about 16%.

In summary: As long as we still need the grid as we will for a very long time, residential solar is just another way of generating wholesale electricity, almost exactly the same as utility scale which is less than half the cost. The only difference being that you save a few percent in line losses when you use generate the power close to where it is used.

 

[Irishjugg]

I think you are way too confident on SCTY, a 1GW/year install rate is no way near a guarantee even with the easier funding that would come with a TSLA merger.

When thinking about the growth projection of SCTY it's important to note that new sales are of a different nature than sales in most other businesses, there are no repeat customers. I think it is very likely that installs will peak at some point and then go down, perhaps fast. There are low hanging customer fruit, the folks who like the idea of solar and buy into the leasing deal and people who doesn't, unless it gets significantly cheaper. The low hanging fruit is ripe for picking, but it can only be picked once, when these juicy fruits are all eaten it will be very hard for SCTY to satisfy their hunger.

This hard peak growth trajectory is playing out right now I think. SCTY wen't from a growth of 80% last year to only expecting 20% growth this year after lowering their yearly guidance last quarter by 16%!, only 1 quarter after issuing their previous guidance. I don't think it is a coincidence that we see the buyout now.

One point on this, they didn't go from 80% to 20% organically, they chose to pivot their strategy to work towards cash flow positive while eschewing extra growth. That's what took the stock from 50 to 25. This was not demand driven, but market response driven in order to make sure financing would stay attractive.

That's my one nitpick, this decrease in growth rate was purposeful, not demand/market driven.

 

[Perfectlogic]

One point on this, they didn't go from 80% to 20% organically, they chose to pivot their strategy to work towards cash flow positive while eschewing extra growth. That's what took the stock from 50 to 25. This was not demand driven, but market response driven in order to make sure financing would stay attractive.

That's my one nitpick, this decrease in growth rate was purposeful, not demand/market driven.

Maybe, all we know is that it is what the management is saying. If this was the case though I don't think they would be cutting guidance 16% only a quarter after issuing their previous guidance. This suggests that there is serious demand and or funding problems.

 

[Foghat]

Maybe, all we know is that it is what the management is saying. If this was the case though I don't think they would be cutting guidance 16% only a quarter after issuing their previous guidance. This suggests that there is serious demand and or funding problems.

No, this isn't the context to why the shift happened. Or why their projections for GWs deployed were adjusted.

First, the federal investment tax credit (ITC) was scheduled to step down to 10% by Jan 1, 2017. This was known for the past 8 years. The entire mainstream industry knew that date was the mark on the wall to have costs be dramatically lower in order to continue to grow and ultimately survive.

Solarcity informed shareholders, planned, and then pivoted to their "post ITC" reality in disclosing 2016 guidance in preparation for the big drop in 2017. Their premise was you can't just flip the switch on Jan 1, 2017, you had to be ready before that if they were to expect to continue to thrive post ITC 2017. So, 2016 they were to slow compounding growth to around 40% and implement key cost cuts to $2.50/watt all in costs as the same time getting to cash flow positive by year end 2016.

However, at the end of last year, the ITC was surprisingly extended at full 30% ITC to 2023 in the omnibus budget package. This was not expected and celebrated because it will give a tremendous runway for a lot of the industry to be cost effective with the traditional grid by the time it expires which was feared would not happen with ITC stepping down in 2017.

Even though this was a long run boon, it had an effect on short term on expected bookings, specifically in commerical, since the pressure to get projects in started and competed before 2017 was no longer there, so this had an effect on 2016 predictions for commercial bookings which are traditionally a largely end of year heavy install, as we've seen historically ~40% of annual installs are done in q4. Again, this suddenly affected annual planning going into Q1 2016.

Another shocker came when literally a week after ITC extension the Nevada public utility commision not only effectively cut net metering, they also cut all people that made solar investments years prior under previous net metering aggrements off net metering as well, so that they too were cut from net metering. Whether you leased or bought the system outright and planned for a "payback" period on your investment essentially was destroyed, some citizens that bought there system thinking a 10 year payback now have a 20 year payback. The PUCs decision litterally demolished the rooftop Solarcity overnight. Vivint left, sunrun left, Solarcity left, some local solar companies went bankrupt and others folded up and moved entire operation to Arizona and California. I think permitting dropped 93% from December to January. This significantly affected Solarcity's projections since they had over 20mws in the que from Nevada as well as hundreds of installers they had to layoff and many others that were relocated to other markets in our states. This was a massive monkey wretch in projecting annual installs just like the ITC just a week earlier. Currently their is a lawsuit pending, as well as significant Nevada community backlash that has led to a ballot initiative to restore net metering and grandfathering, and a governor Sandoval assembled task force to report to the legislator their solution to this issue later in the year, beginning 2017, so this is not being let stand by a lot of different groups, citizens, and government officials.

In addition, certain utilities took their time with specific commerical level inspections/interconnection upgrades which also throw off estimated completion times, which effect quarterly number even when they get install merely a week after the quarter ends.

Even amidst all these snap headwind, Solarcity is able to keep compounding growth in 2016 and has maintained its financing goals on its way to raising $2.8bln, completing outfitting the buffalo factory, beginning early production, as well as drop costs toward the record level 2.25/watt, and all this while achieving cash flow positive going into 2017 installation year.

It seems to me they are not slowing down, they have just had to plow through a few road blocks and cut a few chains to continue to bouy up to meet massive demand.

 

[Perfectlogic]

Nevada cutting off net metering really goes to show how dependant the residential solar model is on being subsidised by the utility. And it shows how great the legislative risk is to SCTY, something I actually warned about before this Nevada thing happened in the SCTY thread. If other key markets follow Nevada and cut off net metering with exististing solar houses also losing the deal SCTY will be filing for chapter 11 the very next day.

as well as drop costs toward the record level 2.25/watt, and all this while achieving cash flow positive going into 2017 installation year.

Who knows if they really will be cash flow positive, Tesla has talked about being cash flow positive in a long time. SCTY lowered their yearly guidance 16% 1 quarter after issuing the guidance. I remember reading that Musk had claimed that SCTY would soon be installing 10s of GW per year. You can't always take the managements word for it, they do have an interest in making the company look good, especially when they are about to try and sell the company.

Why do you say that they are dropping "cost toward the record level 2.25/watt" when last quarter their cost actually ballooned to the highest level in 2 years?

 

[neroden]

I've seen you or someone else mention receiving interest for borrowed shares in the past but I've never experienced this myself over the last 20-ish years. I have accounts with TDAmeritrade, Fidelity, E*Trade and Schwab, all with cash shares including large amounts of TSLA and all with margin enabled but I've never seen interest payments from securities lending.

For information about this, Google "securities lending fully paid", that exact phrase. I don't know if Ameritrade has such a program. Fidelity and Schwab definitely do; you can call them and ask about it (use that exact phrase).

If you have a current Schwab account, the offer pops up as a fairly small link between the headers of the webpage and the contents, when you're looking at your positions list. When you select it... well, uh, the first time I did it, it basically said "please fill out a paper form and mail it back". Anyway, once I did that, then the link listed which stocks they were interested in borrowing. They will only do it for stocks where there is huge short interest, so much that they can't get enough shares to borrow for free -- TSLA's the first one I've ever seen it with because it's never happened to any of my other shareholdings.

If you're actually using margin on an account, you will never get such an offer because if you're using margin, they can borrow your shares for free. At some brokerages this may be true even if margin is authorized and not used, but not at Schwab.

A fine point which might be tripping you up: Whether they can borrow your shares for free is determined by whether there's any use of margin on the *entire account*, so if you borrowed against some other stock in the same account, they can borrow your TSLA in that account even if the TSLA shares are fully paid.

So if you're using margin and want to get this offer, move all your TSLA and SCTY into one account with *no* margin borrowing (you can even call them and remove the margin feature from that account) and do your margin borrowing in an account at a different brokerage which doesn't contain TSLA and SCTY.

 

[neroden]

MitchJi - This is like a old wives' tale in the business world that refuses to die. There was old joke that GM is a financial company that also sells cars. If GM made more money from financing then it would have been a long time ago when operations lost billions.

It was a long time ago. I remember that being said in the 1980s, and I think it was accurate for part of that decade at least. GMAC was *huge*.

 

[UnitaryExecutive]

I bought some more TSLA at 195 and 190 (after exiting SCTY leaps) in the past few days, bringing my average from 208 to 204. My short (and possibly mid) term options are screwed, but at least these shares should provide some long-term comfort. Options are tricky.

To reiterate what I said before, I feel very VERY confident about a Q2 beat. I will once again buy short term options to try and cash in on the delivery numbers. My mistake was in initially buying the short term options too early (literally the day before SCTY). My thinking was that I should get in the options earlier, before the analysts start giving "this will be a beat" notes next week and the beat gets priced in. Now, with attention on Brexit and SCTY, I don't think there will be a big "risk" of a runup next week. Thus, I plan to buy more short term at the money options near the end of next week.

Disclaimer: do your own diligence, definitely don't blindly do what I just said because I'm quite possibly dead wrong.

How is everyone else trading TSLA short term?

I literally did the same thing

 

[neroden]

They use the revolver debt and solar bonds to start construction. bundlena bunch of installs into a tax equity vehicle. Use tax equity funds for upfront purchase of systems to be installed. Then package all those monthly revenue streams as ABS(sub 6%)

The first problem with this is, bluntly, that SolarCity has not successfully refinanced all of its lease/PPA installs as non-recourse ABS. If they had successfully done so, they wouldn't have hundreds of millions of dollars in debt which needs to be refinanced in the the next 2 years. This indicates weakness in the ABS market for PPAs & leases.

The second problem with this is, after they've refinanced all the lease/PPA installs as non-recourse ABS, it's not clear that they make any money. It looks like the ABS investor gets most of the money for the first 20 years... it's not clear there's enough left over to cover overhead.

Both of these problems go away with the bank-loan business model, where the customer gets a bank loan before solar panel installation starts. With that model, SolarCity's profits would be clear, comprehensible, and based on the difference between their costs and what they charge.

 

[Foghat]

Nevada cutting off net metering really goes to show how dependant the residential solar model is on being subsidised by the utility. And it shows how great the legislative risk is to SCTY, something I actually warned about before this Nevada thing happened in the SCTY thread. If other key markets follow Nevada and cut off net metering with exististing solar houses also losing the deal SCTY will be filing for chapter 11 the very next day.



Who knows if they really will be cash flow positive, Tesla has talked about being cash flow positive in a long time. SCTY lowered their yearly guidance 16% 1 quarter after issuing the guidance. I remember reading that Musk had claimed that SCTY would soon be installing 10s of GW per year. You can't always take the managements word for it, they do have an interest in making the company look good, especially when they are about to try and sell the company.

Why do you say that they are dropping "cost toward the record level 2.25/watt" when last quarter their cost actually ballooned to the highest level in 2 years?

All parts of the cost structure stayed flat while sales and market went up due to events and circumstances I described above. In addition costs are spread over less installs as historically(multi year data point) Solarcity installs 16% of all annual installs in q1. Look at the charts and you will see always a bump up in all in cost in Q1. What is rather amazing to point out is that their operational install costs remained flat which is a good indicator they are still creating significant efficiency install capacity even in the low seasonal q1. The sales and marketing costs where an anomaly and it is clear from looking at the historical charts the effects of anomalous events were a significant contributor. The real key to actual lack of cost check is if this number rises in q2 thru q4, but looking the other cost factors maintain during q1, I expect the all in cost to continue its downward trend Through the remainder of the year.

The Nevada situation was clearly an abuse of commission and clearly done in the interest of nv energy the monolopy utility. As a matter of fact, the public utiltiies own head legal council was caught tweeting and posting anti solar comments under an alias over net metering and the solar industry in Nevada. There are many many other conflicts of interest in the net metering case and it is reflected in the multiple lawsuits, citizen signed ballot initiative to return net metering, and the special task force put in place by the governor of the state.

Now we can go round and round with your "subsidy" talking point, the facts show that rooftop solar in Nevada in a benefit above retail to all grid customers regardless if they have solar on their roof or not. The public utiltiy commisson's own 2014 study supported that fact(which they brazenly disregarded in there decision) and in the co sponsored study done by Solarcity NRDC and Stanford university in 2016.

If you want to talk about subsidy, why does NV Energy exceed their legal rate of return by over 30% in recent years and not return any of that to the rate payer? Why does a regulated monolopy make more profit then the entire Las Vegas strip in 2014? Who is subsiding whom here? Can you see how ironic the arguement of regulated utiltiy that makes more profit then the entire Las Vegas strip says a competitor that consumers save money from as well as improve/benefit all other regulated utilties which should result in lower rates to consumers is being "subsidized" by other rate payers? Come on now... We all know that a monoply likes being a monopoly. Competition and a new way of delivering energy is a massive threat to the status quo. Warren buffet said a utility is not a place to become rich, it's a place to stay rich. Competition against his nv energy disrupts that plan for him.

 

[Irishjugg]

Maybe, all we know is that it is what the management is saying. If this was the case though I don't think they would be cutting guidance 16% only a quarter after issuing their previous guidance. This suggests that there is serious demand and or funding problems.

Doesn't this assume that management would be lying to the market/SEC otherwise?