SolarCity shares surged in early trading on Thursday, only to come crashing down by the afternoon following an upgrade from analysts at Baird. They believe the negative sentiment on the company is overdone and that management doesn’t need to listen to calls to lower guidance even more.
Regulatory worries overdone for SolarCity
Baird analysts Ben Kello and Tyler Frank said in a report dated June 9 that the regulatory concerns surrounding the company are overdone because in most net metering cases, there is support for solar. So far year to date, SolarCity shares have plunged by more than 50% due to these concerns, they explained, as bears zero in on the reduction in benefits for net metering by NV Energy. They add that the utility might grandfather in existing solar customers to the new net metering program under the old terms.
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They note that in New York, the proposal from the Solar Progress Partnership sets a framework for long term growth of solar there. Overall, they believe SolarCity is positioned for growth with support from the ITC extension, falling costs and capital market access.
Lower costs, capital market access to support SolarCity
They expect an oversupply of modules to cut costs even more in the second half of this year, although they do note that it’s still unclear if there will be oversupply. However, they add that a number of Chinese module producers have pointed to a 5% to 10% decline in costs. These lower costs should enable the solar company to see higher returns on its projects.
The Baird team also noted that SolarCity has closed a number of transactions recently that showed off how easily it can access the capital markets even though volatility has been extreme. For example, in March, the company announced a tax equity fund to finance about $131 million worth of projects, and then the following month, it announced its first SREC fund to finance up to $40 million worth of projects. There have been even more transactions recently as well.
They point out that the company’s balance sheet is still an area of concern; however, they suggest that it should issue equity to remove the overhang and cushion its fund operations. SolarCity had about $362 million in cash on its balance at the end of the first quarter and since then has sold about $227 million worth of projects to John Hancock. However, the Baird team believes an equity raise would provide further support.
SolarCity shares fell by as much as 1.72% to $22.69 in afternoon trading on Thursday.