Tesla’s merger with SolarCity could be a drag on its results, according to a skeptical analyst, reports Barron’s. The electric car maker will be reporting its fourth quarter earnings next week. This will be an important event for at least one reason – it’s Tesla’s first earnings report since acquiring the solar panel installer for $2 billion in November.
SolarCity facing several challenges
Tesla dropped the word “Motors” from its name, indicating that it is not just about cars, but also other things, including batteries, solar panels, etc. However, some analysts are skeptical that the company’s widening focus will be good for it. In fact, according to them, the solar panel installer could weigh on Tesla’s results at a time when it needs to focus on releasing its Model 3.
SolarCity, which is headed by Lyndon Rive and Peter Rive, is the largest installer of residential solar systems in the U.S. But according to UBS analyst Colin Langan, the company is facing “challenging economics” and “slowing sales growth” as it approaches the end of an essential tax credit in 2022.
“We continue to believe SolarCity is an unneeded distraction during a very challenging launch period,” Langan says.
In its latest quarter, the solar panel installer posted a loss, and Langan thinks the company is losing market share in residential solar panels. The solar energy company is planning to produce solar panels as well starting this year, even as prices for the panels continue to decline. The UBS analyst expects the clean energy giant to lose about $270 million this year, dragging down Tesla’s results.
No clear reason for Tesla shares being up
Tesla shares are up 31% this year and 80% in the past 12 months through Wednesday. In a note to the clients, Langan noted that they struggle to understand the run-up, specifically because deliveries in the fourth quarter missed expectations, though there are some likely factors, like a positive spin on the Musk-Trump relationship, expectations of new reveals (including more autonomous features), and reconfirmed Model 3 launch timing.
“We remain cautious with expected accelerated cash burn ahead of the Model 3 launch … [and] negative earnings revisions with the inclusion of SCTY,” Langan noted.
UBS reaffirmed its Sell rating for the automaker, as earnings expectation appear very high, given a likely drag from its newly-bought solar business and the costs associated with releasing the affordable Model 3 in 2017. Langan has a price target of $160 on Tesla — much less than its Thursday closing price of $268.95.