SolarCity Corp (SCTY): Short-Term Concerns Are Overblown

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SolarCity Corp (NASDAQ:SCTY) shares have plunged more than 34% since March 1. Though the solar installer faced some company specific issues such as a delay in 10-K filing, Goldman Sachs analysts Brian Lee, Neil Mehta and Michael Lapides say that the recent sell-off is similar to the selling pressure in other high-beta stocks. Goldman Sachs said that the recent sell-off is a lucrative buying opportunity. The research firm has a Conviction List Buy rating on the stock with a $85 price target.

Goldman Sachs said that adoption of rooftop solar in the United States remains robust. Installations rose 60% in 2013. Analysts forecast 50% annual volume growth through at least 2016. Goldman Sachs said that the adoption is currently in the early stages of a multi-decade adoption curve as rooftop solar offers attractive end user economics. The recent investor pushback around valuation, growth and operating leverage are near-term concerns that have to be mitigated.

SolarCity pushback: Valuation

Analysts said SolarCity Corp (NASDAQ:SCTY) has an upside potential of $120 per share even if we assume no terminal value beyond 2016. In contrast, a no-growth, no-terminal value through 2016 suggests a downside of $40-$45. That represents a risk-reward ratio of 4:1 at current levels. Goldman Sachs estimates that SolarCity ended 2013 with about $10-$11 per share in NPV cash flows, and 2014 guidance suggests another $10-$11 per share NPV is likely to be added by the end of this year.


SolarCity pushback: Growth

Investors were disappointed when SolarCity Corp (NASDAQ:SCTY) issued panel installation guidance of 78-82MW in the first quarter. Though it reflected a 74% YoY growth, the guidance was below expectations. Goldman Sachs said the decline was driven by mix and seasonality. The analysts’ checks in key states indicate that the slowdown is unlikely to persist. SolarCity estimates 100MW of residential bookings in the first quarter, which points to an improved bookings velocity.


SolarCity pushback: Operating leverage

Many investors have questioned SolarCity Corp (NASDAQ:SCTY)’s ability to post operating leverage as its business grows. Goldman Sachs expects operating leverage to return by June-July. The San Mateo-based company proved its ability when it reduced operating expenses by more than 30% from $0.80 per watt in mid-2012 to around $0.60 a watt in Q3 2013. However, the company’s first quarter opex guidance of $70-$75 million indicates that the operating expenses would rise to $0.85 per watt.


Historically, SolarCity Corp (NASDAQ:SCTY) has gone through periods of negative operating leverage as it invested in its sales network in an attempt to boost bookings. And 2014 is no different. Goldman Sachs expects the operating expenses per watt to decline to $0.50  by Q4, 2014.

SolarCity Corp (NASDAQ:SCTY) shares jumped 2.12% to $56.43 at 10:54 AM EDT on Friday.

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