SolarCity Corp (NASDAQ:SCTY) shares fell by more than 5% to as low as $18.05 today following a downgrade from JPMorgan analysts. Their downgrade follows several others from earlier this month. However, despite the downgrade, they remain bullish on the company and emphasized that they’re not saying the solar panel installer would be a good short position or that investors should sell any position they currently have.
SolarCity to Neutral
Analyst Paul Coster said the main reason for the downgrade was the elevated risk associated with SolarCity shares. Along with downgrading them from Overweight to Neutral, he slashed his price target from $44 to $29, although he still believes the company is undervalued even at current levels.
He said that for now anyway, it’s difficult to get new money into SolarCity because it’s “an early-stage company in an early-stage industry, with a complex, evolving business model that blends together development company and power company economics, poorly expressed in GAAP numbers.” He adds that new money will typically stay away from a company like this as management has been making some complex moves that are difficult to understand.
For example, over the last year, they launched and withdrew a loan product and launched but then de-emphasized a new metric that’s equivalent to CAFD and designed to highlight the PowerCo’s value. They also changed how they tell installations apart from deployments and shifted the valuation of future cash flow.
SolarCity’s growth has begun to taper
Another area of concern for investors is the fact that SolarCity’s third quarter bookings came up short of expectations. Also installation guidance for 2015 and 2016 suggested that management is expected growth to come more slowly than they previously expected. At the time, they cited risks related to the Investment Tax Credit for solar installations, which then was expiring although it has since been extended. Management also explained that they need to moderate expenses to get products to market so that they can reach positive cash flow and profitability more quickly.
Further installations in the fourth quarter came up 6% short of expectations, and management’s first quarter guide was also disappointing as they projected a large deceleration in growth to lower than 20%, compared to last year’s 70%, and this was despite the extension of the ITC. This appears to suggest that SolarCity is losing momentum in Nevada, which has been one of its key markets, and the commercial and industrial side of the market.
Management did reiterate their 1.25 gigawatt guide for this year, representing approximately a 40% growth rate for this year, which does match the residential solar market’s growth but suggests that this year could be back-end loaded—a key risk
Other risks for SolarCity
Coster also noted that the income levels of the solar company’s customers raise questions about whether they will be able to pay. The company said many of its customers didn’t qualify for the 30% ITC, which suggests that it is successfully attracting lower income customers despite its report that the average FICO credit score of its customers is more than 750. The concern is that if there’s an economic downturn, they could be at risk for slow pay or default.
There’s also a headline risk associated with net metering programs, which a number of states are evaluating. Nevada cut the benefits of net metering retroactively for residents who had already signed contracts, which the analyst says is “very concerning.” On the other hand though, California has approved a “favorable plan” and extended it into 2019, he added.