Vivint Solar was upgraded from Hold to Buy by Deutsche Bank analyst Vishal Shah, who also upped his price target from $3.50 to $7.50 per share in a report dated May 26. Following the upgrade, shares of Vivint Solar skyrocketed on Friday, climbing by more than 40% to as high as $3.83, although they still remain well below the 52-week high of $16.
Also today, Shah cut his price target for SolarCity, saying that while he likes the company’s long-term outlook, currently its multiple is “healthy.”
Vivint Solar trading at a discount
The Deutsche Bank analyst said he believes both Vivint Solar and Sunrun are trading at a discount relative to the valuations of their respective operating assets. However, Vivint received an upgrade to Buy and a significant price target increase because he believes the “tax equity environment” is improving. Further, he believes the solar company is well-positioned to achieve its installation targets for this year, which can’t be said of all the companies in the solar sector. SolarCity in particular has been criticized for not meeting expectations.
Shah pegs the value of Vivint Solar’s powerco assets at about $5 per share, assuming a discount rate of 8%. This would place a value of about $2.50 per share on the devco, based on his $7.50 per share price target for the company’s stock. The analyst said even excluding renewals, the company’s operating assets are worth about $3.50 per share, which would provide a valuation of 90 cents per share for the devco.
He also believes Sunrun’s operating assets are worth about $7 per share at an 8% discount rate, which implies that the devco is worth 65 cents per share. Excluding renewals, he sees Sunrun’s operating assets are worth $4 per share, while its devco is worth $2.50 per share.
SolarCity price target cut
SolarCIty shares slumped by as much as 4.13% to $22.75 per today following Shah’s report as he slashed his price target from $49 to $32 per share. He believes the company’s devco is able to generate about $5 per share in annual cash flow, assuming the current installation run rate of 1 gigawatts for the business and 50 cents per watt for the gross margin.
The analyst notes that the Investment Tax Credit for solar installations will remain in place for at least five more years and that historically, SolarCity has managed solid growth in its devco. This is why he believes a multiple of six times devco cash flow is justified, which would give SolarCity’s devco a value of about $31 per share.