SolarCity (SCTY)

[mershaw2001]

I completely agree that retained value is the best way to look at this company, but how this translates into stock price is the big question. It is possible for this metric to be the best way to value the company, and simultaneously be overvaluing the retained value.

What if the value of the solar energy systems, leased and to be leased, is the cost of building the system, and different from the retained value: the retained value would be the money that then comes in from the system?

 

[SBenson]

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.

SolarCity reports both numbers actually. A pure contract value and the one with speculated future renewal.

For the previous quarter - see deck, page 10
Retained Value under Energy Contract - $840 mln
Total Retained Value (with renewal) - $1,291 mln

For the latest quarter - see deck, page 11
Retained Value under Energy Contract - $1,245 mln
Total Retained Value (with renewal) - $1,804 mln

So just with a mere quarter lag the pure retained value grew to be as much as the total retained value. I can afford to stay 3months longer in the stock for the desired Retained Value

 

[Norse]

Morgan Stanley initiated SolarCity (SCTY) coverage with Equal-Weight and target $92

 

[FrozenCanuck]

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.

First, thanks for the quotes from the two reports. I'd love to read them if you can send them to me, dropbox them, whatever.

Second - and I have not fully explored this yet, but I think the assets you are seeing are the result of SolarCity actually owning the equipment they've installed on people's roofs. This asset has a value, and there is something on the liability/equity side of the balance sheet to offset this because they had to raise the cash to build these systems somehow, which is an ongoing issue.

Imagine you and I started a business putting vending machines in stores. We have to buy the machines, and we own them. They sit as an asset on our balance sheet. Say the stores have 20 year contracts with us so we know the $5k machine is going to return $20k over its life. We generate the money up over that period of time, but the asset sits on our balance sheet (and is depreciated) right from the start.

Make more sense? I hope that's an adequate explanation.

- - - Updated - - -

Does anyone actually have full PDFs of analyst coverage reports? I used to have easy access to these when I was a sell side analyst but I exited the biz a few years ago. I'd love to read some of the reports. Usually they focus on the short term, but the initiation pieces are often full of useful info.

 

[SBenson]

First, thanks for the quotes from the two reports. I'd love to read them if you can send them to me, dropbox them, whatever.

Second - and I have not fully explored this yet, but I think the assets you are seeing are the result of SolarCity actually owning the equipment they've installed on people's roofs. This asset has a value, and there is something on the liability/equity side of the balance sheet to offset this because they had to raise the cash to build these systems somehow, which is an ongoing issue.

Imagine you and I started a business putting vending machines in stores. We have to buy the machines, and we own them. They sit as an asset on our balance sheet. Say the stores have 20 year contracts with us so we know the $5k machine is going to return $20k over its life. We generate the money up over that period of time, but the asset sits on our balance sheet (and is depreciated) right from the start.

Make more sense? I hope that's an adequate explanation.

That makes complete sense. Thanks for explaining this out. I have been looking for this answer since a while. Really appreciate it.

After looking at this enough, I see that Retained Value is really the only real way to value this company. It totally explains why management chose to highlight this metric in quarterly presentations.

Unfortunately the source that I read those two reports from has become completely uptight about redistribution. But I have some good news which I just remembered.

Deutsche Bank released a very elaborate initiation report in Jan. It's 63 pages long and is quite comprehensive. You can get a copy of it by going to dbresearch.com -> Contact link at the top -> fill out the form. They usually respond back in a few days. The title of the report is "Still Early Innings of Distributed Generation Era; Initiating with a BUY" written by Vishal Shah published 15 January 2014.

If you want faster response, drop me your email id in a private message.

They have somewhat of an elaborate model for valuation but at the bottom of it, it still is based on Retained Value.

- - - Updated - - -

There are quite a number of skeptics who question the 6% usage for the NPV calc of Retained Value. Here is an interesting tidbit from the Deutsche Bank report:

On the surface, a 6% discount rate appears very aggressive until one considers the difference between the operating side of the company and the development side of the company. It is an important distinction to note that this 6% discount rate is applied only to the systems that the company has already installed or booked. At any given point in time, SolarCity could theoretically shut down the development side of the business and simply collect rent payments from its existing cash flow stream. That is what the 6% discount rate is applied to. Essentially this implies that the company assumes up to 6% default rate over the lifetime of its systems, which is probably on the conservative side.

Long-term foreclosure rates provide a good comparison to judge the adequacy of the 6% discount rate. The only time that foreclosure rates spiked above 6% was during the housing crisis (for subprime loans), and have historically been considerably lower than this. Mortgage payments on a house and payments on the electricity bill will likely take a similar priority in a households bill pay, so we believe the 6% rate is not unreasonable.

 

[ggies07]

With all the back and forth comments on owning vs. leasing months ago, thought this was an excellent article: Would You Rather Own or Lease Your Rooftop Solar?

 

[DaveT]

With all the back and forth comments on owning vs. leasing months ago, thought this was an excellent article: Would You Rather Own or Lease Your Rooftop Solar?

+1. Well-balanced article.

 

[SBenson]

With all the back and forth comments on owning vs. leasing months ago, thought this was an excellent article: Would You Rather Own or Lease Your Rooftop Solar?

I expect cost of the systems to go up over time (if not stay steady). It's very unlikely they will go further down over the course of years. My reasons are
1) More EV driving will mean greater electricity needs. My very rough guess is that an EV doubles the system size for an average user.
2) As net-metering gets pared down, or alternative means of charging solar users for grid usage gains traction, batteries will become an inevitable solution. So adding in the cost of batteries will increase the overall system cost.

As long as SolarCity is able to lower electricity prices (including everything: panels, batteries, grid connection fees etc), they will be able to continue to grow at a very rapid pace. That's what Musk says too.

One can argue that if consumer lending of solar systems grows rapidly then more people might be interested in financing. But I'd contend, given SolarCity's scale, their financing costs would be lower than that of consumers. Same holds with respect to everything else: cost of panels, labor costs, pretty much everything else. Scale should enable them to be the lowest cost provider and still be reasonably profitable. Sort of like becoming the WalMart of Solar.. Ofcourse, SolarCity is not there yet. But the objective is to get there. Meanwhile keep picking the low hanging fruit and continue to expand scale (sort of same exact thing Tesla is doing).

 

[Derek Vinyard]

Morgan Stanley initiated SolarCity (SCTY) coverage with Equal-Weight and target $92

Interesting that this rating isn't shown on BBG.
just had a look at <ANR>. The ratings/PTs are in descending order.

Roth Capital - buy - $98
Credit Suisse - outperform - $97
GS - buy/attractive - $96
Cannacord - buy - $95
Deutsche Bank - buy - $90
Baird - neutral - $83
JPM - overweight - $83
Raymond James - outperform - $80

all PTs published between 08/08 and 08/21 !

 

[RubberToe]

Mosaic now doing direct lending for home solar installations. Targeting "solar leasing companies", whomever they might be :wink:

 

[SBenson]

Thank you for the full page ad. They have been doing this since a few years and their scale seems to be barely in the order of a few million dollars.
Mosaic Inc. - Wikipedia, the free encyclopedia.

This should give Mosaic a run for their money
SolarCity to Introduce Solar Financial Products for Individuals, Institutions of All Sizes | SolarCity

 

[RubberToe]

Not an ad, I should have provided more info. I received this in an e-mail yesterday. Thought that I would post it here to let everyone know that Mosaic is making this push. I have invested in the solar crowd funding model that Mosaic uses for maybe a bit over a year. Currently a small amount in three different properties. Not being able to put up solar panels myself, I wanted to be able to help make it happen in any case, and the return is about 4.5% on the funds invested. I believe that their lending to homeowners directly is a new activity for them. Preciously, they pooled investors money to put in solar installations in various facilities.

RT

 

[pz1975]

Interesting that for such a volatile stock, SCTY has traded essentially flat around $70 for 2.5 months. Anyone who follows it closely care to comment on this current stability?

 

[DaveH]

a lot of scty solar panels on the roof

 

[mershaw2001]

why is there wind energy on the hill? Who even supplies wind energy that tesla would tap into? If they have that many solar panels, why go for a wind farm?

 

[Monsoon]

Simplistic answer, wind still works after sunset.

We can debate the cost/benefit, but one fact remains, wind is 24x7 to some , ehem, degree. (no pun intended.)

 

[Derek Vinyard]

STCY two new PTs

here we go.

 

[Curt Renz]

SCTY is up over 5% during mid-session today, despite the overall market being down. Any ideas why?

 

[FluxCap]

SCTY is up over 5% during mid-session today, despite the overall market being down. Any ideas why?

My guess is GF bill passage in Nevada.

 

[DaveT]

http://www.streetinsider.com/Corporate+News/SolarCity+(SCTY)+Amends+Silevo+Merger/9826394.html