SolarCity Corp (NASDAQ:SCTY), along with the other Elon Musk-related stock Tesla Motors In (NASDAQ:TSLA), continues to confound analysts and experts. Shares fell as much as 2% today, although they performed exceptionally well last year. In fact, SolarCity stock did so well during that it was Lakewood Capital’s second-most losing position for the year — after Tesla, of course.

SolarCity

Lakewood: SolarCity looks worse than Tesla

The firm’s fourth quarter investor letter, which was obtained by ValueWalk, suggest that SolarCity Corp (NASDAQ:SCTY) may be even more overextended than Tesla Motors Inc (NASDAQ:TSLA) at this point. Indeed, Lakewood isn’t alone in this view, as short interest in SolarCity—along with other solar stocks—has been on the rise over the last few months. Lakewood reported losing 150 basis points on its short of SolarCity in 2013.

The firm notes that SolarCity Corp (NASDAQ:SCTY) now has a market capitalization of $7.5 billion, which is almost 25 times tangible book value and almost 30 times expected 2014 revenues. Lakewood notes that bulls believe SolarCity is “a great play” as adoption of solar accelerates since millions of customers will be leasing solar panels from the company soon. However, the firm calls it “a competitive, low return finance business” and said that its economics will always face a cap because of customers just buying solar panels or financing them through their mortgage.

Estimating SolarCity’s value

Lakewood said that in order to determine what SolarCity Corp (NASDAQ:SCTY) is worth, they look at the real long-term economics. Bulls have tried to calculate the present value of lease payments from “millions of potential customers at a 6% discount rate.” They concluded that SolarCity could be worth between $80 and $90 a share.

The firm notes that almost every analyst who follows SolarCity Corp (NASDAQ:SCTY) discounts the cash flows without considering taxes. However, if or when the company becomes profitable, the Internal Revenue Service is certainly going to take its cut. They asked each analyst white they ignored taxes when calculating what SolarCity is worth, and most simply said they hadn’t thought about taxes and then suddenly found a reason to exit the conversation.

What about taxes?

Lakewood estimates that when adding in taxes, this would slash these analysts’ price targets by about 40%. The firm also calls the notion of using a discount rate of just 6% for SolarCity Corp (NASDAQ:SCTY)’s net cash flows “rather silly” because those flows are “highly leveraged and long duration cash flows.” In other words, financing partners pay for most of the installation costs and then have a claim on the lease cash flows which comes ahead of SolarCity’s claim.

The firm also notes that the company would be “significantly impaired” if customers don’t make payments for the full three decades analysts are assuming. After all, SolarCity Corp (NASDAQ:SCTY) probably won’t be the first company in history to keep every single customer for 30 years.

Seeing risks to SolarCity’s cash flows

It then goes on to estimate the risk SolarCity Corp (NASDAQ:SCTY) faces in terms of its cash flows. Most payments which accrue to the company are collected more than 15 years after the company completes the installation because the financing partners get paid first. Those lease agreements last 20 years, so customers who don’t pay after that point “would dramatically impair the cash flows and economics” of the company. The firm’s management believes that by then most customers would probably stop paying under the existing lease anyway because they would be replacing their solar panels because they’re old and worn out.

According to Lakewood, even if SolarCity Corp (NASDAQ:SCTY) does manage to achieve the most bullish targets for customer growth, they see a value of less than $10 a share for shareholders. In arriving at this estimate, they account for taxes, discounting leveraged equity cash flows at 10% instead of 6% and modest customer churn.