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Interesting tidbit from today's earnings conference call:
Analyst: We’re starting to hear more about solar loan products. What’s your view on solar loans? How might they impact the economics of your business if you were to add them to your product offering?
Lyndon Rive: I think solar loans have a lot of potential. We are testing different products on the solar loan side. We’ve always been a financial leader in this space. Once we have come up with the absolute best product out there we’ll make a big announcement of what it will look like.
Analyst: We’re starting to hear more about solar loan products. What’s your view on solar loans? How might they impact the economics of your business if you were to add them to your product offering?
Lyndon Rive: I think solar loans have a lot of potential. We are testing different products on the solar loan side. We’ve always been a financial leader in this space. Once we have come up with the absolute best product out there we’ll make a big announcement of what it will look like.
If you accept SolarCity's retained value calculation (which covers NPV over a 30 year cash flow period), they get $1.72 per watt. They booked 218 MW in the quarter. This means they added $375 million in the quarter, or if we annualize this, $1.5 billion.
The market cap of the company is $6.8 billion.
I realize there are risks, i.e. competition and a declining government subsity (from 30% down to 10%?), but given the focus they have on owning the supply chain (similar to Tesla), does this valuation not grab you all as incredibly low?
I'm early on in my research, but I liked what I saw enough to invest following the Silevo acquisition. It seems to me this is a potential multi-bagger. DaveT, I liked your piece on how to get outsized returns. As a former sell side analyst I can assure you that what Dave wrote is exactly true. The Street focuses very short term, and I feel the short term nature of the market is exactly why we're able to sit back, take a long term focus, and earn better returns on growth companies.
The market cap of the company is $6.8 billion.
I realize there are risks, i.e. competition and a declining government subsity (from 30% down to 10%?), but given the focus they have on owning the supply chain (similar to Tesla), does this valuation not grab you all as incredibly low?
I'm early on in my research, but I liked what I saw enough to invest following the Silevo acquisition. It seems to me this is a potential multi-bagger. DaveT, I liked your piece on how to get outsized returns. As a former sell side analyst I can assure you that what Dave wrote is exactly true. The Street focuses very short term, and I feel the short term nature of the market is exactly why we're able to sit back, take a long term focus, and earn better returns on growth companies.
mershaw2001
I'm short the short sellers
When they say "booked 218 MW" does that mean that they intend to build that in the future, or they did indeed build 218 mw this past quarter?
mershaw2001
I'm short the short sellers
I don't see why this is such a great achievement- it means tons of demand but does that mean that they will be able to install all 218 MW? I'll have to go read their conference call but I don't get why you are so excited, FrozenCanuck.
NigelM
Recovering Member
This might sound harsh, but where I come from thick skin is required for investing. Instead of jumping to conclusions and interpreting what I wrote as being "excited" (emotions are not useful when investing), just actually go read the conf call transcrpit or listen to the replay and then come back. Booked = signed contracts. It's an indicator of near-term future installations.
Back to the topic ...
You are right. this "booked" number explains the retained value leap this quarter, since backlog is included in the retained value calculation.
Hello FrozenCanuck, A fellow SolarCity enthusiast here. I appreciate your sentiment. SCTY actually reported $1,291mln Retained Value for previous quarter and $1,804mln for the latest. Thus they added $513mln in the quarter, bringing the annualized number to $2Bln change.
I am not sure if Retained Value can be interpreted as deferred-earnings though. I am not sure if that is what you are alluding to. Given your background, what's the best way you see this metric can be interpreted as?
The one thing I truly appreciate in this quarter's presentation is how they broke down their cost structure and gave full detail. Page 8 of the deck. Or the supplemental document for full detail.
Looking at some comments on this thread one would think SCTY's operating expenses are so high, given their "bloated corporate structure", that their bankruptcy is imminent. These seemingly deliberate vengeful remarks are truly appalling!
Thank goodness, they explained it out and tied it all back to the real financial reports.
Turns out,
Installation Costs are $2.29/W
Sales Costs are $0.48/W
G&A Costs are $0.26/W
--------------------------
Total Costs are $3.03/W
While they accumulated $2.32/W of retained Value for Shareholders.
This is an incredible business that abundantly pays off in the long run.
Note: There are many idiotic articles on Seeking Alpha talking about reported EPS and such. They don't understand the basics of this business. The entire operating expenses (Sales + GA) are recorded in one shot, while Revenues are recorded over 120 quarters!! Of course the EPS will be negative. It doesn't matter!
Looking at some comments on this thread one would think SCTY's operating expenses are so high, given their "bloated corporate structure", that their bankruptcy is imminent. These seemingly deliberate vengeful remarks are truly appalling!
Thank goodness, they explained it out and tied it all back to the real financial reports.
Turns out,
Installation Costs are $2.29/W
Sales Costs are $0.48/W
G&A Costs are $0.26/W
--------------------------
Total Costs are $3.03/W
While they accumulated $2.32/W of retained Value for Shareholders.
This is an incredible business that abundantly pays off in the long run.
Note: There are many idiotic articles on Seeking Alpha talking about reported EPS and such. They don't understand the basics of this business. The entire operating expenses (Sales + GA) are recorded in one shot, while Revenues are recorded over 120 quarters!! Of course the EPS will be negative. It doesn't matter!
NigelM
Recovering Member
With hypergrowth companies, I often find that the more simple the analysis, the easier it is to analyze a stock's potential. So I'd rather have a simple, easy to understand (and track) model versus highly complex forecasts and variables. I can be off by a wide margin on actual outcome, but if the upside potential is enormous that's OK.
So in keeping with that logic, here's ONE way of looking at SolarCity.
They want to have 1 million customers by 2018. They've said this several times, and they most recently said they're on track to achieve it after adding 30,000 new customers to the backlog last quarter. They are going to need to ramp that 30k per quarter massively to hit the goal, but let's assume they do.
Each customer has an average retained value of $14k.
So if they get to 1 million customers they'll achieve retained value of $14 billion.
They'll still be growing at that point (very low market penetration), so it stands to reason we might still put something like a 2-3 multiple on this number, giving you a potential market cap of $28-42 billion.
Keep in mind I'm throwing out an uber-simple model for now. This model suggests that, within 4 years, we could be looking at something in the vicinity of a 5-bagger.
Thinking way longer term, what's to stop SolarCity from having an installed base of 5 million or even 10 million customers? The economics will obviosly change, so the retained value probably wouldn't be as high anymore (per customer), but why can't this happen?
This is why I'm so interested in the idea of owning as much of the supply chain as possible. I think it's critical to their leadership in the industry.
So in keeping with that logic, here's ONE way of looking at SolarCity.
They want to have 1 million customers by 2018. They've said this several times, and they most recently said they're on track to achieve it after adding 30,000 new customers to the backlog last quarter. They are going to need to ramp that 30k per quarter massively to hit the goal, but let's assume they do.
Each customer has an average retained value of $14k.
So if they get to 1 million customers they'll achieve retained value of $14 billion.
They'll still be growing at that point (very low market penetration), so it stands to reason we might still put something like a 2-3 multiple on this number, giving you a potential market cap of $28-42 billion.
Keep in mind I'm throwing out an uber-simple model for now. This model suggests that, within 4 years, we could be looking at something in the vicinity of a 5-bagger.
Thinking way longer term, what's to stop SolarCity from having an installed base of 5 million or even 10 million customers? The economics will obviosly change, so the retained value probably wouldn't be as high anymore (per customer), but why can't this happen?
This is why I'm so interested in the idea of owning as much of the supply chain as possible. I think it's critical to their leadership in the industry.
@FrozenCanuck, Appreciate your comments. I actually believe they will hit the 1mln mark by mid-2017 itself. They have consistently grown around 100% rate for many years and there are no signs of slowing down. At that pace mid-2017 is doable. Of course there are risks to it, primarily if their financing avenues don't scale at the same pace. But looking at the trend, it seems achievable.
Relating to your long term view, Lyndon Rive said multiple times that they will expand into other countries either this year or next. So that should make the 5mln or 10mln customer marks that much more achievable. He is also on record saying that he wants to grow SolarCity to become the largest energy company in the world (it's on youtube somewhere). In my view they are clearly setting up the company in a way to achieve ambitious goals like that.
After all, in Musk's big vision, Tesla addresses consumption side of the energy equation, while SolarCity addresses the production side. There is nothing to indicate SolarCity's long term goals would be small.
On the flip side though, I have some trouble equating Retained Value directly to Market Cap. Ideally growth in Retained Value should directly correspond to growth in Book Value (Shareholder Equity) as SolarCity puts all the contracts on the Assets side of the Balance Sheet. But that doesn't seem to be happening. I am not sure why. Do you have any insights into this?
Relating to your long term view, Lyndon Rive said multiple times that they will expand into other countries either this year or next. So that should make the 5mln or 10mln customer marks that much more achievable. He is also on record saying that he wants to grow SolarCity to become the largest energy company in the world (it's on youtube somewhere). In my view they are clearly setting up the company in a way to achieve ambitious goals like that.
After all, in Musk's big vision, Tesla addresses consumption side of the energy equation, while SolarCity addresses the production side. There is nothing to indicate SolarCity's long term goals would be small.
On the flip side though, I have some trouble equating Retained Value directly to Market Cap. Ideally growth in Retained Value should directly correspond to growth in Book Value (Shareholder Equity) as SolarCity puts all the contracts on the Assets side of the Balance Sheet. But that doesn't seem to be happening. I am not sure why. Do you have any insights into this?
Ok - the retained value on contracts is not the same as retained earnings. The value should flow into earnings over a long time, at which point it lands on the balance sheet and you'll see it as asset / equity.
It seems reasonable to me to look at market cap as a direct function of retained value, provided you believe the value is real. The contracts that create this retained value should translate into actual earnings, right? And since they are already present value calculations, it's a simple way to look at discounted cash flow of current contracts.
Then investors will have to adjust for future growth, risks of the company making poor investments, etc.
It's an unusual one for me. I'm used to looking at companies that don't have 20 year contracts on cash flow, but are more like Tesla or Apple, and just sell products in-quarter and generate earnings. I'm probably in very good company here, so let's figure this out together.
mershaw2001
I'm short the short sellers
My understanding of retained value is that it goes beyond the contracts that have been signed with the current customers (of 20 years) and assumes that 90% of those customers will remain in the lease terms for another 10 years, which can add 29% or so over the value of the contracts signed. I would have preferred that the company calculated retained value as the value that they have actually signed people up for (20 years) and not included a speculative portion- that way there would be unexpected pleasant upside in 20 years. When I think of their retained value, i drop it by a third for the above reason.
Since demand doesn't seem to be a problem now, it seems that money to pay for installations or the number of crews installing each day are the limiting factors. To me, the fact that the quarter will be cash flow negative isn't a problem unless it prevents them from installing booked systems because there isn't enough money.
Since demand doesn't seem to be a problem now, it seems that money to pay for installations or the number of crews installing each day are the limiting factors. To me, the fact that the quarter will be cash flow negative isn't a problem unless it prevents them from installing booked systems because there isn't enough money.
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NigelM
Recovering Member
Adding customers to the backlog isn't necessarily a healthy indicator. In a rapid growth environment it needs to be considered together with the average time metric between booking and deployment.
I reached out to Investor Relations at one point and I got an answer very much in-line with what you are saying. But here is my beef with this: looking at the latest 10Q document, Balance Sheet on page 3, they already have a line item saying "Solar energy systems, leased and to be leased – net" with $2Bln as asset. So it makes me think that the future revenue is already recorded as asset. So I am missing the connection when you/investor-relations says that value will flow into earnings over time and then land's into assets. To me it feels like its already in assets.
I understand retained value intuitively. I am just unable to put it together with any of the financial statements.
I have access to two research reports. Both of them strongly support valuation through retained value.
1) JP Morgan - direct quote from latest report - "We believe retained value is the most appropriate way to value this stock since it provides a present value of future cash flows on a net basis."
2) Raymond James -direct quote from latest report - The #1 question we’ve heard from investors as part of our coverage of SolarCity over the past year and a half surrounds the “right” valuation method and how to think about the many variables. To state the obvious, SolarCity will not have positive earnings, or even EBITDA, anytime soon. A revenue multiple is theoretically viable, but we agree with management that a discounted cash flow (DCF) approach is the most relevant one. The starting point for DCF is the metric entitled “retained value based on discounted forecast of net cash to SolarCity”: $1.80 billion as of 2Q14.
So everything points to saying that Retained Value is the best way to look at this company. I only wish I can better understand it's connection to 'shareholder equity' as they both seem to imply the same concept.
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