SolarCity (SCTY)

[Foghat]

I was in an ice cream shop a few weeks ago noticing all the ice cream quarts sweating in the refrigerators learning the power was out for over an hour. You better believe the owners were scrambling to get the utility to get power back up as fast as possible. As most of the customers were walking away they were swearing up and down they were going to invest in a back up generator. Now with this pace financing, Solarcity and tesla energy might be getting a call very soon.

my only reservation with small business and 20 year leases is the high turn over rate. Many small business go out of business or move locations over 20 year period. I'm assuming Solarcity understands this and probably has plans for lease transfers and other continuity plans when new leasees take over at some point. Maybe they have a plan to work with building owners then the business themselves. Also, small business community solar seems like a winner program as well.

 

[jhm]

SolarCity Introduces Nations Most Affordable Solar Power Option for Small and Medium Businesses - NASDAQ.com

The PR release gives more details, including that this is only for owner-occupied businesses with flat roofs. I can understand starting here, but I hope they can develop an approach for business that lease their property.

Think of a typical strip mall. Could SolarCity set up a deal with the building owner such that tenant businesses use the electricity and the building owner is duly compensated. Basically a microgrid would be deployed, but I am not sure what utility laws would run afoul. If a share of the solar power were included within the property lease, perhaps the building owner could simply charge higher rent. Community solar is yet another option.

 

[Foghat]

Solarcity has a .56%(one half a percentage point) 180 day delinquency rate. Less then 1% don't pay their Solarcity bill. That's pretty incredible. Although 50% of all installs were last year, that's still mythical delinquency rates for systems dating back 9 years now.http://www.structuredfinancenews.com/news/abs/solarcitys-latest-securitization-tackles-tax-credit-in-new-way-257472-1.html

 

[blakegallagher]

getting pretty close to shareholder letter / earnings call, It feels nice having a little momentum going into earrings. First time in a few earnings I dont hold any short term options so we should double the share price this week lol

http://files.shareholder.com/downloads/AMDA-14LQRE/38984614x7889658x841998/1F20DCE1-B37D-445A-8E2A-C955C9234D6A/SolarCity_2Q15_Earnings_Presentation_FINAL.pdf

Looks like they knocked it out the park. added 44k new customers ! wow.

40 percent of the float is short! What a good time to be long (sorry electricity)

 

[colettimj]

Huh, that's odd. Clicked on the link for today's webcast (not yet started) and I'm hearing the ER for Sketchers?

 

[ggies07]

getting pretty close to shareholder letter / earnings call, It feels nice having a little momentum going into earrings. First time in a few earnings I dont hold any short term options so we should double the share price this week lol

http://files.shareholder.com/downlo...olarCity_2Q15_Earnings_Presentation_FINAL.pdf

Looks like they knocked it out the park. added 44k new customers ! wow.

40 percent of the float is short! What a good time to be long (sorry electricity)

Hell Yes! That's what I'm talking about. Thanks for the link.

 

[Foghat]

Wow, 395MWs in bookings this quarter?!? That's more booked this quarter then Vivint has installed in total... Sunedison just bought them for $2.2bln! Solarcity booked that in a quarter. Major increase in Commercial bookings. Amazing growth and amazing demand.

$7.7bln in total contracts... Over $3bln in net retained value...


Fantastic quarter.

 

[aznt1217]

The short float is nearly 40% that's crazy..

 

[jhm]

Making great progress toward the million customer goal. 262,500 now. Need only grow 56% per year for next 3 years to reach goal.

 

[Foghat]

Making great progress toward the million customer goal. 262,500 now. Need only grow 56% per year for next 3 years to reach goal.

They are growing at 86% compounded growth right now, so we may see a 1.8GW guidance number for 2016 annual guidance. Lyndon Rive said they need to hit an annual 1.5GW per year beyond 2015 to reach 1 million customers safely by mid 2018. With current 86% compounded growth rates (as well as Lyndon's hint that they expect 2016 guidance to exceed 60% industry wide growth rates), I also believe they will increase the 1 million customer guidance for mid 2018. Thus, I conjecture we'll see 2016 guidance and revised 2018 guidance together come either q3 report or q4 report.

also, I've seen a media report describing Solarcity hitting 10,000 customers in three major Bay Area towns/cities. I'm wondering if 10,000 is a trigger number for aggregation? I mention this because solar city's highest concentration of tesla energy storage is in PG&E territory in the Bay Area. If orders/installs look good come q3 report in early November, could we start to see aggregation start as early as q1/q2 2016? I think California aggregation returns are better then net metering returns, so could this mean another cent or two drop in price per kWh (solarcity blended retail price)? If so we could see 10s of billions more in market value open up for Solarcity. Powerwall numbers and guidance come November could be significant indicators to how soon this aggregation will occur.

 

[blakegallagher]

They are growing at 86% compounded growth right now, so we may see a 1.8GW guidance number for 2016 annual guidance. Lyndon Rive said they need to hit an annual 1.5GW per year beyond 2015 to reach 1 million customers safely by mid 2018. With current 86% compounded growth rates (as well as Lyndon's hint that they expect 2016 guidance to exceed 60% industry wide growth rates), I also believe they will increase the 1 million customer guidance for mid 2018. Thus, I conjecture we'll see 2016 guidance and revised 2018 guidance together come either q3 report or q4 report.

By the end of this year they will either need to revise their goal up or tell their installation team teams to slow down!

When they end the year with over 350k customers a one million goal by mid 2018 will look foolish or bearish coming from management.

I stick by my mid year 2017 goal as being more appropriate.

- - - Updated - - -

Huh, that's odd. Clicked on the link for today's webcast (not yet started) and I'm hearing the ER for Sketchers?

That is odd and really funny

 

[MartinAustin]

Nice to see SCTY coming back into the green today after this morning's volatility. Higher than average trading, too.

 

[SBenson]

From the latest shareholder presentation deck

"Economic Value Creation of $196M for equity shareholders in Q2, or $2.02 per basic share"

I always wondered if this can be interpreted as conventional Earnings. Just to be sure even though they are based on future cash-flows, they are discounted back.

IF we were to interpret it as earnings $2/qrtr is $8/year meaning SCTY is trading at a P/E of 7.5!

Even ignoring the growth entirely, if we were to assume that SCTY will generate that sort of share-holder value every quarter pretty much forever, just taking the P/E to S&P 500's average of 18.5 would put the stock at $148.

The end result is not very different from various other valuation models that analysts/us have been using. This is just another way of looking at it.

What do you guys say?

 

[jhm]

From the latest shareholder presentation deck

"Economic Value Creation of $196M for equity shareholders in Q2, or $2.02 per basic share"

I always wondered if this can be interpreted as conventional Earnings. Just to be sure even though they are based on future cash-flows, they are discounted back.

IF we were to interpret it as earnings $2/qrtr is $8/year meaning SCTY is trading at a P/E of 7.5!

Even ignoring the growth entirely, if we were to assume that SCTY will generate that sort of share-holder value every quarter pretty much forever, just taking the P/E to S&P 500's average of 18.5 would put the stock at $148.

The end result is not very different from various other valuation models that analysts/us have been using. This is just another way of looking at it.

What do you guys say?

Value creation is a net present value calculation on the value of solar deployed this quarter. It does not relate directly to earning because there are all sorts of accounting rules around when exactly revenue is to be recognized. So much of the NPV is discounting of cash flow to be recognized well in the future. So it represents the longterm value being added to SolarCity's book of business. So they are creating longterm value for shareholders, only a small portion of that is presently recognized in earnings. Earnings lag the value being created; thus, you can simultaneously be losing money and creating value.

My own view is that net retained value is an apt value metric for SolarCity. It would be reasonable for the stock price to trade at a multiple of net retained value, but I'm not sure the market agrees on this point. What is curious is that if SolarCity were to ever spin off a yieldco, the primary value transfered would be this net retained value. That is what the yieldco would own, and it would pay a dividend on the contracted payment streams. Thus, yieldco investors would be inclined to value that security on the basis of dividends and sustainability of held value. This would potentially attract an entirely different class of investors oriented toward dividends rather than growth. So for now, I like to think of net retained value as a proxy for the value of a yieldco that SolarCity might one day spin off. Also keep in mind that when SunEdison acquired Vivint Solar, part of that transaction was to strip off the solar financing contracts and sell that book of business to SunEdison's yieldco. So we now have an example of how such an assets might be valued by an acquiring party. If SolarCity market cap were to ever drop well below its net retained value, it theoretically could be acquired by some other entity and have its book of business sold to a yieldco for a profit. I don't see this ever happening to SolarCity, but it illustrates quite clearly why the market cap of SolarCity should always trade above net retained value (properly valued).

So it is important to see that quarter after quarter, SolarCity is actually adding value to net retained value.

 

[jhm]

Thinking a little bit more about value creation, I think I may have an approach to valuing SolarCity. The idea is to think of the Development Company and Power Company as two separate entities. Specifically the DevCo markets and installs solar systems and sells the financing contracts to the PowerCo, which holds these assets as a yieldco. The DevCo sells these assets to the PowerCo at a fixed discount to net retained value. Thus, the value of SolarCity is the sum of the values of DevCo and the PowerCo.

First, the value of the PowerCo is $3B.

Second, the DevCo is able to create about $800M in incremental net retained value over the next 4 quarters. For simplicity, suppose it is sold to the PowerCo for $800M. Moreover, let's suppose that the DevCo can be expected to grow at 15% per year. (This is extremely conservative given track history.) SolarCity has a beta of about 3. So under CAPM theory, the discount rate should be 20% = 2% + 3×6%. (I don't really like this theory, but I'm trying to put forward a conventional argument.) So the Gordon growth model for the DevCo puts the value at Earnings / (discount - growth) = $800M/(.20 - .15) = $16B.

Thus, the combined value for SolarCity is $19B. This works out to $196 per share. Clearly, the market is not valuing SolarCity in this manner. Current, market cap is just $5.77B. But what is interesting here is that if SolarCity were actually to spin off PowerCo as a yeildco, the market would inclined to value DevCo and PowerCo along these lines. Upto this point, I have not been interested in SolarCity spinning off a yeildco--I actually like the combined company--but in the current situation SolarCity is severely undervalue. A yeildco could rectify this. Essentially, this is just a trick of accounting. With a separate yeildco, the $196M in value creation from last quarter gets fully recognized as earnings when sold to the yieldco. If SolarCity were actually posting this as quarterly earnings, the stock would not be stuck in the $50s.

 

[Bearman]

So under CAPM theory, the discount rate should be 20% = 2% + 3×6%. (I don't really like this theory, but I'm trying to put forward a conventional argument.)

I follow the reasoning in your post JHM and think it makes sense, but I am curious about your reasoning regarding the discount rates used here?

Thanks

 

[jhm]

I follow the reasoning in your post JHM and think it makes sense, but I am curious about your reasoning regarding the discount rates used here?

Thanks

This is a fairly standard set up. Beta measures the correlation with the market as a whole for which the market expects about an 8% return. The correspding risk free rate of return is about 2%. So that 8% breaks down to 2% for risk free return and a 6% premium for market risk. Now SolarCity has a beta of 3, so it represents 3 times as much market risk as the market as a whole. Thus, for SolarCity under this theory and efficient pricing, the risk adjusted return should be 2% + 3 × 6% =20%.

I am not a fan of this approach. It imies that you should be able to predict the growth of stocks based on beta, but this does not hold up well in statistical practice. Beta may be a reasonable way to measure exposure to market risk, but it is a lousy way to predict growth. And frankly, if it lacks this predictive validity, I think it is unfit for discounting cash flows for valuing stock. This is why I would prefer analysts to calibrate their DCF models to actual market prices for the stock, than to use a weak theory to tell the market how it ought to be discounting cash flows for a given stock. This is the fundamental error of fundamental analysis.

Even so, I use this conventional nonsense here to get a sense of how a conventional stock analyst might treat a separate DevCo.

 

[electracity]

Thinking a little bit more about value creation,.........

Doesn't change the fact that 2/3 of their fanciful retained value calculation occurs in PPA years 20 to 30, AFTER the contract has expired. Seeking Alpha reports solarcity has change in PPA terms to "Auto Renewal", and says:

"Note that the auto renewal clause is likely intended for busy customers who may forget to cancel or seniors and other sensitive groups who may not comprehend contractual obligations. This "snooze you lose" clause sticks the hapless customers with an additional year on the contract term if they do not cancel the contract at least 30 days prior to termination."

http://seekingalpha.com/article/3368805-solarcity-earnings-will-the-company-disclosures-get-any-better-this-quarter

 

[dalalsid]

Doesn't change the fact that 2/3 of their fanciful retained value calculation occurs in PPA years 20 to 30, AFTER the contract has expired. Seeking Alpha reports solarcity has change in PPA terms to "Auto Renewal", and says:

"Note that the auto renewal clause is likely intended for busy customers who may forget to cancel or seniors and other sensitive groups who may not comprehend contractual obligations. This "snooze you lose" clause sticks the hapless customers with an additional year on the contract term if they do not cancel the contract at least 30 days prior to termination."

http://seekingalpha.com/article/3368805-solarcity-earnings-will-the-company-disclosures-get-any-better-this-quarter

Ok that article was the pits. Here is the reality from that same article:

"If you are in compliance with your PPA, you have the option to renew your PPA for up to ten (10) years in two (2) five (5) year renewal periods. We will send you renewal forms three (3) months prior to the expiration of the Term, which forms shall set forth the new Monthly Payments due under the renewal PPA, based on our assessment of the then current fair market value of the System. If you want to renew, complete the renewal forms and return them to us at least one (1) month prior to the end of the PPA."

So they will send you everything and if you make no action then you get auto renewed for a year.

"If you don't send us anything in writing after we send you the renewal forms, then this PPA shall renew for an additional one (1) year term at ten percent (10%) less than the then-current average rate charged by your local utility and shall continue to renew for one (1) year terms at the same rate as your first renewal until (NYSE:I) you give us notice at least thirty (30) days prior to a renewal term that you do not wish to renew; or (ii) we send you a notice terminating the PPA."

What is SolarCity supposed to do if you don't cancel or renew??

 

[Jonathan Hewitt]

What is SolarCity supposed to do if you don't cancel or renew??

I think a member of this site is inferring that if you don't cancel or renew then SCTY should give them free electricity from the goodness of their hearts, or perhaps come to the person's house and hold their hand while the person signs the renewal form?