SolarCity (SCTY)

[Perfectlogic]

If the ITC is extended, Solarcity can lower $/kWh sooner which opens up more households to sales faster given the 30% ITC continuation. They do much more tax equity deals and much bigger abs over the course of the extension which can turn out to be a years more. This would allow them to continue expanding at 80% growth given the robust pipeline of tax equity at 30%. So instead of selling 1.25Gws worth, they can do 1.6-1.8GWs, etc... If they can they can install 1.6-1.8, they can sell more product, thus if the 30% tax credit is extended, they will increase sales.

I'm not sure I follow your point. Look, it's pretty simple, say SCTY sells power for 13cents/kwh in '16 which is possible because of the 30% ITC. If the ITC goes down to 10% in '17 SCTY will have to raise rates a bit or take a significant margin cut compared to '16. If SCTY plans to raise rates in '17 (I believe so based on your posts) then SCTY will try to educate potential customers about the upcoming price increase to pull demand forward and otherwise just eat through as much of their backlog as possible while the 30% ITC is still in place. In short both SCTY and customers have an interest in getting solar on their roof in '16 if the ITC expires in '17, because it is cheaper for both parties in '16 compared to '17, which means that if the ITC expires in '17, the year '16 will be a rush to get as much business done as possible pulling demand from '17 if possible. If the ITC doesn't expire then no demand will be pulled forward and '16 wont be artificially big. I really hope we are on the same page now.

 

[davecolene0606]

Vertical integration

Power storage

Annuitazation

 

[TheTalkingMule]

Wholesale electricity cost is part of the retail price. The retail cost of electricity from utilities will go down going forward as renewables push down wholesale price and load balancing becomes cheaper through batteries. Residential solar will have difficulties keeping the price as it is today as net metering policies gets pulled back to a more reasonable level like we are seeing in Hawaii right now.

This sounds good on paper, wholesale costs go down therefore retail prices go down. Problem is, you're forgetting the entire existing profit model of utilities. If solar is allowed to set the pace, how is any other source of electricity going to be profitable at the wholesale level?

Again, all we need to do is look to what's already happened in Germany. The marketforces of solar simultaneously zeroing out peak midday demand while at the same time essentially removing customers from the base has been waaaay too much for legacy utilities to handle. Their value is down 60% over the last few years and they're begging the govt to let them divest from ANY form of production.

Solar is an existential threat to utilities and you're acting as if they'll embrace it. They can read the news. Utility scale solar is super cheap and is going to be amazing for new markers like India/Africa, but in the short and medium term around here its residential solar vs the legacy utils for quite a while.

 

[pGo]

I noticed that SG&A is flat to high when demand seems to be huge. I would expect customer acquisition costs, advertising to go down but doesn't seem to be the case. Any idea why?

 

[dalalsid]

When this bullish article was penned (early August 2015) SCTY was still trading around $60. It has been cut in half just three months later.

I guess SCTY is severely undervalued now according to the author of that article. I already voiced my concerns in the comment section of that article:



Sometimes "genius" business models with heavy leverage fail because of something as simple as missing matching debt maturities...especially when/if credit markets turn sour.

PS: I'm not short SCTY but I think this example shows how difficult it is to value the company. Imho SCTY is more of a sector-specific leasing/bank operation (with very long-term assumptions and contracts very few retail investors seem to truly grasp) with an installation and service unit attached, not a solar company.

I'm the author of that article and yes SCTY is severely undervalued right now. And they are doing exactly what I pointed out would cause profits. Slow growth = profit. To quote the article:
"A simple way to look at SolarCity's future is that profits come when QCPs cross installation costs. But the problem with those lines crossing is that SolarCity is growing too fast for that to happen until growth slows."

So let's see of SCTY can actually do that. I wonder if it will stop bears from complaining. Solarcity is now at (Retained Value - Renewals) * 1.5. This is probably a golden opportunity to buy. I have some DITM 2018 calls but if the prices stick to low 30s, I might get some OTM calls.

 

[jhm]

After getting a text from a fellow investor I realized I had been working and missed the shareholder letter coming out. I did a quick scan of it and was pretty upset they had cut guidance so much. After listening to the Conference call I feel much better. This was no a demand issue, it was a strategy issue.

I dont think this "Pivot" was really all about the ITC. Based on their answer to the caller who asked why they thought they were trading at 1 x Net Retained Value now vs 3 x Net retained value in the past. I think this is about getting the share price up. People who dont understand the business think they will never be profitable. As investors see them heading to cash flow positive the multiple applied to the retained value will increase. I think they need the stock price to be higher so they can do a secondary when they announce their 5-10 gig panel factory.

I would of loved a followup on how ramped up the 100 MW line in Fremont is. It will be really interesting to watch the Silevo/Zep tech develop over the next couple of years.

Good strategy often attends to multiple purposes at once. So ITC preparedness is one purpose, but I certainly see shoring up the share price as another crucial purpose. And that was the reason I jumped at the opportunity to buy at $31 last night. Clearly, the market was not willing to give SCTY any value for its extraordinary growth rate as we have been discussing here for months. Indeed, I suspect that many investors saw the hypergrowth as more of a negative risk than a source of value creation. In hypergrowth, a company incurs too many scale up expenses in one quarter for things that won't pay for themselves for several quarters out. Thus, you operate at loss to sustain high levels of growth.

Buying sales leads is one of those expenses. The leads you buy this quarter turn into installations next quarter and start to generate positive cashflow a quarter after that. So if you're paying too much for leads in the first place, it is really making a mess of your earnings this quarter.

So the market has said it's not willing to pay for hypergrowth. Fine. Strategically SolarCity can step down into 40% growth with near term profit. I think the market will warm up to this.

The share price is important to the bond markets and lenders. So is is very important for SolarCity to shore up the share price. Moreover, without that, SolarCity would potentially find itself in a position where it has to do more equity financing to balance the debt financing. Short would have had a field day if SolarCity were to start doing secondary stock offerings just to sustain hypergrowth.

Lyndon is being very proactive here. It takes incredible discipline and foresight to dial back growth ambitions. I think shareholders are well served with this move.

- - - Updated - - -

I think you are misunderstanding the ITC. It doesn't matter if SCTY is leasing the panels to the customer, they still get the full 30% ITC if the panels are installed before the ITC goes to 10% in '17.

Actually, I think Foghat makes and astute point. The majority of potential lease customers are oblivious to the whole ITC issue. They are not making the calculation that if I don't lock in my lease this year, then next year leases will go up. Someone who is buying their solar system will probably be much more aware and concerned about ITC stepdown. So the pull forward effect is probably much stronger for those who would buy than those who would lease.

 

[TheTalkingMule]

Actually, I think Foghat makes and astute point. The majority of potential lease customers are oblivious to the whole ITC issue. They are not making the calculation that if I don't lock in my lease this year, then next year leases will go up. Someone who is buying their solar system will probably be much more aware and concerned about ITC stepdown. So the pull forward effect is probably much stronger for those who would buy than those who would lease.

That's the customer demand side, what about SCTY's incentive to push as much as possible? Getting 30% off the up front costs of a 20 year investment is too good to ignore. I would imagine SCTY is going to ramp up installs as much as possible even to the point of just racking roofs without panels or wiring, just to get the install "started". I know I would.

Again, Germany. They installed 2GW in ONE MONTH just prior to a step down in FIT and that's a cloudy country 1/4 of our size. Your point about the consumer mentality is spot on, but SCTY can't ignore the extra savings(profit).

 

[jhm]

Let's be clear. SolarCity has found that buying certain sales leads has become too expensive. This has driven up the sales cost per Watt in the face of strong demand. This may seem hard to reconcile, but it is important to consider the competitive landscape. SolarCity has been gaining marketshare, and competitors are hungry to catch up. Moreover, in the face of ITC stepdown, many competitors want to lock customers ahead of it. This creates a situation where competitors bid up the cost of leads and the effectiveness of leads and media spend is diluted. So the whole industry could be overspending on sales and marketing on a per Watt basis. SolarCity may be exhibiting good industry leadership by de-escalating it's spending on sales leads. In the past, it has been good to acquire scale and presence in the market. This established a large base of customer referrals, which yeild the lowest sales cost per Watt. Competitors will scramble to get this kind of scale for themselves, which they need to do before the stepdown. SolarCity has the luxury of saying they really don't need to pay so much for a few extra leads.

 

[TheTalkingMule]

Opening below $31, that's cute. Gonna cry looking at the 2017 call prices today. :crying:

 

[pGo]

Let's be clear. SolarCity has found that buying certain sales leads has become too expensive. This has driven up the sales cost per Watt in the face of strong demand. This may seem hard to reconcile, but it is important to consider the competitive landscape. SolarCity has been gaining marketshare, and competitors are hungry to catch up. Moreover, in the face of ITC stepdown, many competitors want to lock customers ahead of it. This creates a situation where competitors bid up the cost of leads and the effectiveness of leads and media spend is diluted. So the whole industry could be overspending on sales and marketing on a per Watt basis. SolarCity may be exhibiting good industry leadership by de-escalating it's spending on sales leads. In the past, it has been good to acquire scale and presence in the market. This established a large base of customer referrals, which yeild the lowest sales cost per Watt. Competitors will scramble to get this kind of scale for themselves, which they need to do before the stepdown. SolarCity has the luxury of saying they really don't need to pay so much for a few extra leads.

This also suggests there is nothing unique SolarCity offers to customers and hence they have to fight to get customers. Generally, such businesses are hard to make money. This market has just too many competitors and no near-term profit. A lot depends on government regulations around the world. Valuing such an industry is not easy as one rule can make or break a company.

 

[TheTalkingMule]

This also suggests there is nothing unique SolarCity offers to customers and hence they have to fight to get customers. Generally, such businesses are hard to make money. This market has just too many competitors and no near-term profit. A lot depends on government regulations around the world. Valuing such an industry is not easy as one rule can make or break a company.

I suppose it goes without saying that no one is to feed to trolls. The conversation passed this point in 2012.

 

[pGo]

I suppose it goes without saying that no one is to feed to trolls. The conversation passed this point in 2012.

You can say that. Or, a complete failure on your part to understand the business model.

If a company has to spend more to acquire customers in a growing market, this means there is too much competition or your product is not unique. Seriously hard to make money here.

 

[esk8mw]

Just got long at $30.05. First entry into this stock. Good luck everyone.

 

[electracity]

This also suggests there is nothing unique SolarCity offers to customers and hence they have to fight to get customers. Generally, such businesses are hard to make money. This market has just too many competitors and no near-term profit. A lot depends on government regulations around the world. Valuing such an industry is not easy as one rule can make or break a company.

It's not that they are not unique. It is the value of the "unique" is nowhere good enough to maintain the margins they had in the past. Their customer acquisition costs are rising, and their margins are shrinking on the sales they make (decreasing retained earnings).

They will never grow again at the rate of past quarters. Now they will slow down and cherry pick.

Their older PPAs have substantial value. How to value their panel factory is a big guess.

 

[TheTalkingMule]

The clear reason for the purposeful slowdown in 2016 is 100% about the ITC step down. They have to hit 2.50/watt all in cost target by end of 2016. This has nothing to do with demand. Demand is out pacing installs by a huge margin right now, so this is a deliberate slow down just to be clear.

What do you make of the drop to $1.92 install cost for this quarter? Due more to a higher percentage of commercial installs or a real drop in residential install cost? $1.92 is not to far from the Germany levels I've been looking for us to achieve in the US.

The acquisition costs are the primary target here. They recently dumped their relationship with with energy company because lead costs were too expensive. Now they are going to reduce those expensive "last few customers" cutting sales team growth in half while maintaining 40% install growth. If you look at install costs, they are nearly at 2017 $1.90 level right now, well ahead of schedule.

Are these lead costs and recent hiring about facilitating a burst in 2016 installs to take advantage of the ITC until December? Logically you would then trim down ahead of slimmer margins in 2017 -->?

I just hope it's not reactionary or something like that. The residential solar install market has not been touched yet and the misinformed are talking about an end to low-hanging fruit. I don't see SCTY getting through the low-hanging fruit until years and years down the line, PA is the 6th largest state in the union and SCTY hasn't even started here. Am I nuts?

 

[tftf]

How to value their panel factory is a big guess.

This could indeed become a big drag in case installations drop. The panel business is highly competitive, it's not possible to simply dump excess inventory at good margins.

SCTY could be forced to delay the build-out and future expansion plans....they kept talking about plans to expand to 5 or even 10 GW late last year (before getting to just 1GW for now).

At least direct competitors like SUNE/VSLR (if that deal really passes...who knows in this environment?) and RUN don't have this burden attached.

Vertical integration is not a magic panacea.

 

[aznt1217]

This could indeed become a big drag in case if installations drop. The panel business is highly competitive, SCTY could
be forced to delay the build-out and future expansion plans.

At least direct competitors like SUNE/VSLR (if deal passes...who knows in this environment?) and RUN don't have this burden attached.

Delay the build out? They've actually accelerated quite a bit. The factory went up REALLY quickly in less than a year.

 

[tftf]

Delay the build out? They've actually accelerated quite a bit. The factory went up REALLY quickly in less than a year.

To make it clearer: SCTY could be forced to delay the build-out and future expansion plans....they kept talking about plans to expand to 5 or even 10 GW late last year (after getting to 1GW for now).

How does that add up with a slow-down in installations?

Solar panel technology keeps changing rapidly. It doesn't make sense to build out years in advance...

 

[replicant]

there is nothing unique SolarCity offers to customers

How difficult would it be for them to switch the bulk of their business from lease to loan?
Isn't economy of scale a significant advantage in marketing, sales, loan financing, panel purchase, installations, microgrid management, etc?

 

[dalalsid]

To make it clearer: SCTY could be forced to delay the build-out and future expansion plans....they kept talking about plans to expand to 5 or even 10 GW late last year (after getting to 1GW for now).

How does that add up with a slow-down in installations?

Solar panel technology keeps changing rapidly. It doesn't make sense to build out years in advance...

Why, is Sunpower cutting back? SCTY can undercut SPWR in high efficiency panel pricing for everything they don't need. All the other manufacturers (CSIQ, JKS, JASO, TSL etc.) are heading towards 5GW of production. SCTY heading towards the same goal will get them to be price competitive with those guys in overall system cost at least, if not panel pricing. I'm not sure if SCTY provided a timeline for the 5GW, lets say 2020? Can they get to that much demand by 2020?