SolarCity Corp (NASDAQ:SCTY) has climbed to new heights this week after a series of catalysts. Shares rose as much as 4 percent during the regular trading day on Friday. JPMorgan analysts have initiated coverage on the company with an Overweight rating and $68 per share price target. They say the company is in a “growth sweet-spot in the large solar PV market.”
SolarCity is undervalued
Analysts Paul Coster, Mark Strouse and Paul J Chung say they see SolarCity as being undervalued “based on projected retained value.” They are using the net present value of the company’s long-term service contracts, net of upfront funding. They say SolarCity Corp (NASDAQ:SCTY)’s position in distributed solar offers a “very early-stage growth opportunity.”
The analysts are predicting that rooftop solar will contribute 3.5 percent or 121 gigawatts of U.S. electricity by 2030 and 6 percent or 240 gigawatts by 2050. Today solar contributes less than .1 percent of U.S. electricity. They said SolarCity’s 2018 target of 6 gigawatts, compared with .5 gigawatts today, appears to be “easily attainable” with this year’s penetration rate at less than .2 percent of 41 million homes in the total addressable market.
SolarCity dominates roof-top solar
The JPMorgan analysts report that SolarCity Corp (NASDAQ:SCTY) holds about a 20 percent share of roof-top solar installations and has the largest installed base of 75,000 customers. They said the company’s competitive advantage lies in its “nationwide sales and distribution, purchasing power, vertically integrated delivery, and access to low-cost finance.”
They said the company’s long-term 20-year contracts plus upfront tax rebates offer cash flow visibility, and it’s already greater than $1.5 billion. That cash flow funds investment from third parties. The analysts estimate that asset-backed finance will be able to lower the cost of capital for SolarCity to less than 6 percent. They believe that by 2018, SolarCity Corp (NASDAQ:SCTY)’s accumulated value “could be very significant.” The company is aiming to have 1 million customers by then and 6 gigawatts of capacity. That implies a 2018 retained value of almost $13 billion, which is $98 per share on a present value basis.
Upsides and downsides to SolarCity
The analysts said downside risks to their SolarCity Corp (NASDAQ:SCTY) projections include scheduled reduction of the 30 percent tax credit to 10 percent in 2017, as well as rising interest rates and loss of access to third-party funds. On the other hand, potential upsides include higher electricity rates, lower panel costs, and lower cost of capital. They also said the company’s recent acquisitions and partnerships could drive additional growth for the company ahead of forecasts.