SolarCity Corp (SCTY): Demand For Solar Panels Augers Well

SolarCity Corp (SCTY): Demand For Solar Panels Augers Well
By BrokenSphere (Own work) [CC BY-SA 3.0 or GFDL], via Wikimedia Commons

SolarCity Corp (NASDAQ:SCTY) has its Outperform rating reiterated and price target raised from $71 to $81 by Baird Equity Research analysts Ben Kallo and Tyler Frank.

We have updated our NPV model to include higher MW deployments in 2016 and discounted the cash flows to YE:2014. We believe SolarCity Corp (NASDAQ:SCTY) is on track to meets its 2014 guidance of 475 MW-525 MW after its recent expansion of 10 operating centers in Northern California. SolarCity remains our top pick as it is levered to the rapidly growing U.S. residential and commercial solar markets.

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SolarCity’s market share increasing

It is estimated SolarCity Corp (NASDAQ:SCTY) had ~26.2% of the U.S. residential solar market in Q2:13, higher than the next eight competitors combined and up from ~20.1% in Q1:13 and ~19.7% in Q4:12. For 2014, SolarCity is targeting between 475 MW and 525 MW of project deployments, a growth rate of ~80.0% (at the midpoint). We believe SolarCity can achieve this target based on its growing market share, increasing U.S. solar demand, and ~$583M in cash which should facilitate growth.

Highly levered to North America solar market which should see strong growth in 2014+. We believe the residential and commercial solar markets will grow ~20% and 13.8% y/y, respectively, as demand accelerates. We believe SolarCity Corp (NASDAQ:SCTY) will be able to capture additional market share through its financing options and scale.

Reduction in financing costs

We expect further reductions in SolarCity Corp (NASDAQ:SCTY)’s financing costs as it brings additional asset-backed securities to market. Additionally, SolarCity Corp (NASDAQ:SCTY) is exceeding its cost reduction road-map targets and should see lower labor costs/watt with the ZEP racking system.

Lock-up period expires on January 15th and February 14th for a total of ~51M shares, which could put pressure on the stock. We would be buyers of the stock on weakness.

Our price target is based on our estimates of the net present value of SolarCity Corp (NASDAQ:SCTY)’s current contracted projects and our estimates of projects deployed from 2014 through 2017. We use a 6% discount rate for initial contracts and 8% for renewal contracts and have discounted the cash flows to YE:2014. We have increased our 2016 MWs deployed estimate to 1,060 MW from 990 MW.

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