SolarCity Corp Coverage Initiated With ‘Neutral’

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SolarCity could be a major disruptor in the solar industry, but right now there are more questions than answers in an industry that’s in its infancy and undergoing rapid changes. UBS analysts think competition will pressure margins across the industry as they ramp up marketing expenses, essentially forcing SolarCity to do the same.

SolarCity to disrupt the industry?

Because so much in the solar industry is up in the air right now, analysts Julien Dumoulin-Smith, Michael Weinstein and Paul Zimbardo have initiated coverage of SolarCity with a Neutral rating and $53 per share price target. They especially see promise in the areas of residential and commercial and industrial solar even though the U.S. government is stepping down the investment tax credit in these areas.

They believe these sub-sectors will be “the most resilient” through the expected trough in 2017 because of the reliance on subsidies handed out at the state level in connection with net metering. Further, they think SolarCity’s “cost edge” will hold the competition at bay and enable “disproportionate volumetric growth.”

Still concerns about competition

Even though they think SolarCity is more than able to beat back the competition, the UBS team remains on the sidelines for now. They note that execution is extremely important right now and point out that there are signs of rising marketing expenses among solar companies. Recent data points suggest that they are addressing “modestly disappointing” volumes as friction among them grows.

They see SolarCity as the sector’s “clear name-brand leader,” but they expect these rising marketing expenses to pressure margins across the industry. Further, they’re not fully convinced that the projection for megawatt growth to reach 1 million customers within the next three years is actually reachable.

SolarCity to weather changes

As the government fades out the investment tax credit, the U.S. solar industry as a whole is starting to transform, but the UBS team isn’t worried because they expect the transformation to come in stages. They note that many investors are concerned about the phasing out of this tax credit, but they think the changes are “designed to simply reduce compensation in tandem with declining costs.”

Despite their Neutral rating, they think SolarCity will end up having a competitive edge over its peers, which they view as being less efficient. Further, they think the “wider policy backdrop” will encourage adoption of more renewable energy as state subsidy targets drive base demand. Also they think the Environmental Protection Agency’s new climate change program will boost the industry as a whole, possible driving a doubling down on renewable energy through 2030.

As of this writing, shares of SolarCity were down 1.24% at $49.32 per share in premarket trading this morning. The UBS team predicts that SolarCity shares will remain pressured as the sector as a whole pulls back due to cost rationalization.

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