SolarCity Corp Coverage Initiated With “Hold” Rating

SolarCity Corp (NASDAQ:SCTY) has been back on an upward trend since June, and at this point, Morgan Stanley analysts think the company’s share price is already right about where it should be. They initiated coverage of the solar panel system installer with an Equal Weight rating on the company’s stock.

SolarCity’s share price already assumes opportunity

Morgan Stanley analyst Timothy Radcliff sees plenty of positives in SolarCity, although he thinks the company’s current share price already reflects most of the opportunity in the solar market, according to Barron’s. Assuming a 50% contract renewal rate and a 50% average renewal price, he estimates a retained value of $1.8 billion this year, $4 billion next year and $7.8 billion in 2016.

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Currently SolarCity’s market value is $6.5 billion, which is a retained value multiple of 3.6 times for this year.

Plenty of room for SolarCity to grow

Radcliff says there does look to be plenty of opportunity in the solar market as companies seek to replace traditional energy generation. He suggests that the company’s addressable market may have opportunities for “significant growth” from the current 4 gigawatt residential installed base. He’s estimating a 27% rate of compound annual growth for the full distributed generation segment between last year and 2020, with the assumption that the Investment Tax Credit falls to 10% after 2016.

The analyst thinks SolarCity remains well-positioned in the market, adding that the company is the “preeminent” provider of solar leases in the U.S. Currently the solar panel system installer enjoys a 30% share of U.S. residential employments over the last 12% and over 40% of the residential leased U.S. projects.

Sustainable growth?

He does warn, however, that SolarCity’s nearly one-third U.S. market share may be unsustainable as competition increases. He thinks the company will do well over the next couple of years but that its competitive advantages will decline after that point. From 2017 through 2020, he’s expecting 200 basis points per year of market share declines for the company.

However, he said SolarCity can offset some of the concerns about increasing competition by lowering its cost, potentially through its June acquisition of Silevo, a maker of solar cells. He notes that with the acquisition, the company gains “control over an important piece of the supply chain,” which is important because of how supply as swung “in relation to demand” over the last few years.

The analyst also suggests that SolarCity may end up following competitors to create a YieldCo, although it has not yet announced plans to explore or create one.