SolarCity shares surged today following a key upgrade from analysts at Morgan Stanley. They noted that the stock had declined 21% over the last month despite the company’s strong fundamentals and signs of strong growth in residential solar. That 21% decline was roughly in line with decline of the TAN solar index, it should be noted, however.

Indeed, Morgan Stanley isn’t the only firm that’s bullish on SolarCity right now, as Goldman Sachs analysts issued a glowing report on the solar panel installer earlier this week, calling the stock their top solar pick. Following today’s upgrade, shares of SolarCity climbed as much as 8.06% to $46.52 per share.

SolarCity Corp Surges After Upgrade For Underperformance

SolarCity to Overweight

In a report dated today, Morgan Stanley analyst Stephen Byrd and his team said they maintained their $93 per share price target but upgraded SolarCity from Equal-weight to Overweight. Their price target represents upside of approximately 116% (from Wednesday’s trading price).

After the share price decline which happened over the last 30 days, the say the stock was trading at around their bear case target of $35 per share. Their bear case assumes the company stops growing by 2020 due to competition. On Monday, SolarCity shares dipped to $35.22 per share, at around their 52-week low, in early trading before beginning to climb. The 52-week low is currently $34.65 per share.

Why is Wall Street so bearish on SolarCity?

The Morgan Stanley team named a handful of reasons investors appear to be concerned about SolarCity, but they think such concerns are overblown. In fact, they don’t think the company has any of the financing problems other solar companies have, saying that they think SolarCity has been “unfairly punished” for them.

Indeed, solar companies have widely been establishing YieldCos to support and monetize their solar projects, and YieldCo stock prices have declined recently. They see even this concern for the rest of the solar city as being overblown as well.

Oil prices affecting solar industry?

Looking at the sustainable energy industry as a whole, investors have been concerned about tumbling oil and gas prices. This is another area in which Byrd and his team think SolarCity has been “unfairly punished.” They believe the “perceived” link between renewable energy and oil prices is “largely overblow” as only about 1% of the electricity generated in the U.S. in 2013 came from oil.

Internationally, that percentage is a little higher, but they note that it’s still less than 5%. Also SolarCity mostly just operates in the U.S.

Threat from natural gas slightly higher

The Morgan Stanley team does admit that the decline in natural gas prices is a bit more relevant to renewable energy because gas generated approximately 27% of the electricity in the U.S. in 2013. As a result, it is likely to take share of the energy market, although the analysts believe the price movements in natural gas will “Have only muted effects on the bills of end-use retail customers.

The reason for this is because such a big portion of the fixed costs of natural gas come from transmission and distribution. Also there is quite a diverse fuel mix throughout the U.S. For example, residential households in California spend about 16 cents to 18 cents per kWh, so a huge change of 50 cents/ mmBtu in natural gas prices would impact these customers by only 0.3 cents to 0.5 cents per kWh or about 2%. Overall, they’re expecting utility bills  to rise by about 6% to 7% per year in California over the next several years.

The estimates are similar for New Jersey as well, which they say suggests that the economics of the rooftop solar industry are mostly insulated from any more declines in natural gas prices.

SolarCity’s fundamentals remain strong

Also SolarCity specifically has been performing well within its industry, surpassing management’s guidance for installations during the second quarter. Also the quarter marked the first time the company provided TTM PowerCo cash-available-for-distribution to make it easier to compete with YieldCos. Further, SolarCity updated investors on the progress it has made in expanding into solar for small- to medium-sized commercial projects.

The Morgan Stanley team does expect the company’s growth to slow in 2017 due to the phasing out of the solar Investment Tax Credit, as it declines from 30% to 10% that year. However, they think SolarCity will be able to offset that loss of tax equity by cutting costs and seeing incremental proceeds from its asset-backed securities. By 2017, they’re expecting to see levered NPV at about 41 cents per watt, assuming 75% of customers renew their contracts with SolarCity at 75% of the original PPA price.

SolarCity gets credit

Further, they note that SolarCity’s clientele tends to have excellent credit scores, which makes them less likely to default on their contracts. The company’s customers have an average FICO credit score of more than 735, and the lowest credit score among its customers is 650.

Because of these high credit scores, the solar panel installer can offer products at lower cost than their utility bills, which the Morgan Stanley team sees as a big economic advantage for it.