SolarCity shares edged lower during regular trading hours on Tuesday after analysts at Morgan Stanley slashed their price target. However, they didn’t downgrade the stock even though other firms have done so recently. They also adjusted their estimates to make them more conservative based on a number of risks that are facing all of the rooftop solar companies that focus on the residential end of the market.
The company’s stock closed down 2.28% at $18.01 per share on Tuesday before rallying in after-hours trade to erase that decline.
SolarCity price target to $52
Analyst Stephen Byrd and team said in a note dated March 1 that they’ve cut their price target on SolarCity from $78 to $52 per share and listed three of the biggest risks they see facing the solar panel installer. They continue to rate the stock as Overweight, however, because they expect the company to keep growing rapidly over the “next several years.” Additionally, they note that its stock reflects “highly bearish growth prospects” at current levels and believe that the risks look to be “more than priced-in.”
One of the three main challenges they see facing SolarCity right now is simply hitting its targets for growth. Bears are especially concerned about whether the company can hit its 2016 megawatt installation guide because the first quarter outlook was soft. Further, the solar panel installer is exiting Nevada, which had been a big market for it, and is eliminating the MyPower solar loans, which it only introduced recently. Also the market in Massachusetts is changing, creating a fresh headwind
The Morgan Stanley team does agree that there is something to these concerns, so they’ve cut their megawatt installation forecasts to an 8% miss of management’s full-year guidance.
Cash, regulatory headwinds also pose dangers
And then there’s the issue of cash, which faces every solar panel installer. The analysts think SolarCity might have problems raising enough tax equity and debt “at reasonable terms.” They’re not as worried about tax equity as they believe these concerns are overblown, but they agree with the worries about debt costs. They said that if asset-backed security costs keep rising, the company might need other funding sources to pay for future installations. They had already been expecting debt costs to rise, however.
SolarCity is also very affected by any regulatory changes that are made at the state level as such changes might make it uneconomical for consumers to have solar panels installed. The company abandoned Nevada overnight after the state’s regulators changed net metering rules, which demonstrates just how important regulations are to its business. However, the Morgan Stanley team notes that there have been about 40 regulatory battles regarding net metering for solar power in various states, and only three of them had negative impacts on the rooftop solar industry.
Positive catalysts expected
Interestingly, their bear case for SolarCity is a mere $7 per share based on negative views of all the above challenges and others they didn’t highlight. The bear case assumes significant slowing of growth through 2020 and no growth after then. It also assumes that existing customers do not re-contract with the company.
However, they reassure investors that they see positive catalysts in successful asset monetization and pricing power. They believe SolarCity could monetize some of its assets in the near future, based on management commentary from the fourth quarter earnings call. If the solar panel installer is successfully able to do this, they think it would be a positive catalyst for its shares as it would also provide a source of cash to fund future installations.
Additionally, they believe pricing power might be able to offset slowing growth because bigger players have much lower per-unit costs and better access to tax equity and the debt markets.