Raymond James hosted SolarCity investor meetings following the drop in the company’s stock last week after it trimmed its installation guidance for 2016. On Wednesday, analyst Pavel Molchanov reiterated his Strong Buy rating on the stock and addressed three major problems that have been the cause of investors’ worry lately. Molchanov also explained why his firm believes the stock is oversold and ripe for a bounce or short squeeze.
Problem of disappearing demand and financing
The first myth the analyst addressed is the disappearing residential PV demand. He said SolarCity’s growth outlook of 15% to 20% does imply a slowdown, but there is not much evidence of the much-cited saturation of the residential PV market in the U.S., aside from Hawaii.
“There is ample latent demand, in established state markets as well as new ones,” the report said. There are chances that utilities blocked rooftop PV, but “net metering will become a moot point once storage goes mainstream,” the analyst added.
The second myth is that financing is a problem. Jim Chanos and other SolarCity shorts claim that this is a major struggle in the solar sector and compare the company with SunEdison, which has gone bankrupt. But the truth is that the firm has never faced any trouble in raising project-level capital.
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Molchanov pointed out, “Despite a high-yield landscape that has clearly seen better days, SolarCity successfully priced two securitizations year-to-date.”
6% discount rate not feasible for SolarCity?
The third myth is that a “6% Discount Rate Is No Longer Believable.” The analyst notes that SolarCity’s shares have re-rated to where they currently stand “at a small discount to the $21/share net present value (fully installed, fully contracted) of the OpCo.” The NPV multiple was close to 3x a year ago, says Molchanov, who wonders why the market became more skeptical about the 6% discount rate which has been “SolarCity’s (and its peers’) mantra since going public?”
The latest securitization was completed at 6.25%, while the Hancock deal was done at 8%, the analysts notes. This suggests that 6% is too low. However, the previous years’ deals were closed at sub-5%. Molchanov said the unavailability of a clear-cut answer is the fact of the matter, the proper discount rate is a matter of judgment, and there will be variability over time.
“Patient investors can take advantage of the stock’s current entry point while waiting for the market to regain confidence in the 6%,” the analyst concluded.
At 10:02 a.m. Eastern today, SolarCity shares were up 0.94% at $20.24.
