SolarCity (SCTY)

[TheTalkingMule]

It sure feels like a lemonade factory in here.

If they had performed "better" this drop might actually have been worse. Unless I'm using the wrong logic all their cost is up front, they sign up a million customers on a Monday all they have on Tuesday is a massive pile of expense.

I didn't initially like the PPA model, I'm a buy the hardware and pay for the hookup kind of guy. But once I saw a few married with a bunch of kids friends go through the deicsion process, it was pretty obvious SCTY as the most appeal to those who aren't "Tesla people". Most folks on here would run their own install or at a minimum buy outright, the "middle and high hanging fruit" wants zero up front cost, US manufactured panels, a company that won't disappear and zero maintenance. Who else is offering that?

I'm just angry for not seeing this reaction coming, in retrospect it's so obvious.

 

[hirox]

- The Bookings dropped in Q3 relative to Q2, which is alarming

From Solarcity:
Continuing to set the stage for our growth in 2016, our sales activity outpaced our installations by a wide
margin with 345 MW Booked and 35,535 new net Customers added in the quarter. This represented a
decline compared to the 395 MW Booked in Q2 2015 owing in part to the implementation of a new
cancellation policy. Previously, we automatically cancelled uninstalled contracts that had been inactive for
120 days. We have updated the inactive policy to 90 days for two reasons: (1) as an efficiency measure,
so that our customer account management team’s processes will be focused on our active customers, and
(2) to better align the metric with our quarterly reporting period. This impacted MW Booked by ~35 MW,
and if we had maintained our prior cancellation policy, we would have booked 380 MW, up 65% year-over-
year. Bookings are tracking very well for Q4 and we expect to be at or near our Q2 high again.

 

[Perfectlogic]

If they had performed "better" this drop might actually have been worse. Unless I'm using the wrong logic all their cost is up front, they sign up a million customers on a Monday all they have on Tuesday is a massive pile of expense.

I didn't initially like the PPA model, I'm a buy the hardware and pay for the hookup kind of guy. But once I saw a few married with a bunch of kids friends go through the deicsion process, it was pretty obvious SCTY as the most appeal to those who aren't "Tesla people". Most folks on here would run their own install or at a minimum buy outright, the "middle and high hanging fruit" wants zero up front cost, US manufactured panels, a company that won't disappear and zero maintenance. Who else is offering that?

I'm just angry for not seeing this reaction coming, in retrospect it's so obvious.

The middle and high hanging fruit isn't available to the residential solar market as utility scale is half the price and they are in direct competition. People wants the cheapest electricity and the only reason residential is viable is because of a legislative tailwind. Also I'm pretty sure the drop was mainly because of guidance miss and low guidance for next year.

 

[electracity]

The middle and high hanging fruit isn't available to the residential solar market as utility scale is half the price and they are in direct competition. People wants the cheapest electricity and the only reason residential is viable is because of a legislative tailwind. Also I'm pretty sure the drop was mainly because of guidance miss and low guidance for next year.

How does utility scale solar price directly effect consumers?

 

[Perfectlogic]

From Solarcity:
Continuing to set the stage for our growth in 2016, our sales activity outpaced our installations by a wide
margin with 345 MW Booked and 35,535 new net Customers added in the quarter. This represented a
decline compared to the 395 MW Booked in Q2 2015 owing in part to the implementation of a new
cancellation policy. Previously, we automatically cancelled uninstalled contracts that had been inactive for
120 days. We have updated the inactive policy to 90 days for two reasons: (1) as an efficiency measure,
so that our customer account management team’s processes will be focused on our active customers, and
(2) to better align the metric with our quarterly reporting period. This impacted MW Booked by ~35 MW,
and if we had maintained our prior cancellation policy, we would have booked 380 MW, up 65% year-over-
year. Bookings are tracking very well for Q4 and we expect to be at or near our Q2 high again.

Still a drop, unless there is some seasonality coming into play it looks like SCTYs bookings may have peaked already.

@electracity

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.

 

[aznt1217]

It sure feels like a lemonade factory in here.

Yes. And I think we will taste the sourness tomorrow and feel the sweetness shortly after.

 

[gene]

Yes. And I think we will taste the sourness tomorrow and feel the sweetness shortly after.

I have 3500 shares already. Think I'll do a bit more shopping tomorrow.

 

[jhm]

In US, new renewable installations 1,460 times more than new coal : Renew Economy

According to FERC, YTD installations of new natural gas capacity is down 50% y/y, wind up 50%, and utility solar is down 41%. Meanwhile SolarCity is up 83% YTD y/y.

Specifically, SolarCity installed about 600 MW ytd. If this is about 1/3 of the distributed installs, then distributed solar added about 1.8 GW while utility added 1.1 GW.

So it looks like wind is knocking out gas, while distributed solar is out running utility solar.

Of course, we can also speculate about how this my play out in coming year, especially with the contingencies around ITC. But we have learned this evening that SolarCity is pivoting its strategy from outrageously high growth to high growth, about 40%. This will save them on acquisition cost. Moreover, they intend to raise rates as much as an additional 1 c/kWh from their average of 13 c/kWh. Utilities have already raised their rates so they have some competitive slack to do this. So why raise rates and cut specifically marketing spend on buying leads? Lyndon clearly stated that they are positioning the company for the ITC stepdown. Their opportunity to gain share is post ITC stepdown. Competitors how lower rates in 2016 without cutting costs will be poorly positioned in a post stepdown world. So Lyndon is positioning the company to enter that world on a cash positive footing. I had not anticipated this strategic pivot, but am warming up to its logic.

I also suspect that adding batteries features into this slower growth strategy, but Lyndon did not spell that out. Lowering $/kWh while raising PPA rates could create enough slack for adding batteries. Slowing into a product shift like that seems prudent.

Oh, yeah, while MW installed may only grow by 40% in 2016, management is talking about growing revenue by 70%. So how will they pull that off? It sounds like they've got something up their sleeve.

As for utilities, they are going to keep raising rates regardless how cheap utility solar gets and regardless what happens with ITC. They may well choose to milk ITC in 2016 and ramp up utility solar. But if the stepdown happens, I think they'll go back to growing wind and shrinking gas, and utility solar at 10% ITC just won't have much of an advantage over wind. Wind, batteries and aging fossil plants is pretty much all a utility really needs. If wind and batteries can't lower residential rates, utility solar won't make a much of a difference either.

 

[Foghat]

In US, new renewable installations 1,460 times more than new coal : Renew Economy

According to FERC, YTD installations of new natural gas capacity is down 50% y/y, wind up 50%, and utility solar is down 41%. Meanwhile SolarCity is up 83% YTD y/y.

Specifically, SolarCity installed about 600 MW ytd. If this is about 1/3 of the distributed installs, then distributed solar added about 1.8 GW while utility added 1.1 GW.

So it looks like wind is knocking out gas, while distributed solar is out running utility solar.

Of course, we can also speculate about how this my play out in coming year, especially with the contingencies around ITC. But we have learned this evening that SolarCity is pivoting its strategy from outrageously high growth to high growth, about 40%. This will save them on acquisition cost. Moreover, they intend to raise rates as much as an additional 1 c/kWh from their average of 13 c/kWh. Utilities have already raised their rates so they have some competitive slack to do this. So why raise rates and cut specifically marketing spend on buying leads? Lyndon clearly stated that they are positioning the company for the ITC stepdown. Their opportunity to gain share is post ITC stepdown. Competitors how lower rates in 2016 without cutting costs will be poorly positioned in a post stepdown world. So Lyndon is positioning the company to enter that world on a cash positive footing. I had not anticipated this strategic pivot, but am warming up to its logic. I also suspect that adding batteries features into this slower growth strategy, but Lyndon did not spell that out. Lowering $/kWh while raising PPA rates could create enough slack for adding batteries. Slowing into a product shift like that seems prudent.

As for utilities, they are going to keep raising rates regardless how cheap utility solar gets and regardless what happens with ITC. They may well choose to milk ITC in 2016 and ramp up utility solar. But if the stepdown happens, I think they'll go back to growing wind and shrinking gas, and utility solar at 10% ITC just won't have much of an advantage over wind. Wind, batteries and aging fossil plants is pretty much all a utility really needs. If wind and batteries can't lower residential rates, utility solar won't make a much of a difference either.

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.

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.

They also need to be more internally funded when ITC drops to 10%. By cutting growth spending in half, they will be able to do that and as Lyndon says will be able to grow beyond 1.25Gw/year in 2017. And clearly, many competitive operations will not be able to survive in that 2017 environment and Solarcity sees this as an opportunity to hire competitors skilled employees saving big on training programs and personnel development.

This, again, is all predicated on the ITC dropping to 10%. Lyndon said 2016 guidance of 1.25Gws is based on the ITC drop. You don't prepare for the drop on Jan 1 2017. You prepare well in advance of that. This guidance reflects that.

Now, everything changes if the ITC is extended. If the ITC is extended, Solarcity will up guide the 1.25GWs guidance. To note, Lyndon Rive did state he believes it will be extended.

 

[Perfectlogic]

In US, new renewable installations 1,460 times more than new coal : Renew Economy

According to FERC, YTD installations of new natural gas capacity is down 50% y/y, wind up 50%, and utility solar is down 41%. Meanwhile SolarCity is up 83% YTD y/y.

Specifically, SolarCity installed about 600 MW ytd. If this is about 1/3 of the distributed installs, then distributed solar added about 1.8 GW while utility added 1.1 GW.

So it looks like wind is knocking out gas, while distributed solar is out running utility solar.

Of course, we can also speculate about how this my play out in coming year, especially with the contingencies around ITC. But we have learned this evening that SolarCity is pivoting its strategy from outrageously high growth to high growth, about 40%. This will save them on acquisition cost. Moreover, they intend to raise rates as much as an additional 1 c/kWh from their average of 13 c/kWh. Utilities have already raised their rates so they have some competitive slack to do this. So why raise rates and cut specifically marketing spend on buying leads? Lyndon clearly stated that they are positioning the company for the ITC stepdown. Their opportunity to gain share is post ITC stepdown. Competitors how lower rates in 2016 without cutting costs will be poorly positioned in a post stepdown world. So Lyndon is positioning the company to enter that world on a cash positive footing. I had not anticipated this strategic pivot, but am warming up to its logic.

I also suspect that adding batteries features into this slower growth strategy, but Lyndon did not spell that out. Lowering $/kWh while raising PPA rates could create enough slack for adding batteries. Slowing into a product shift like that seems prudent.

Oh, yeah, while MW installed may only grow by 40% in 2016, management is talking about growing revenue by 70%. So how will they pull that off? It sounds like they've got something up their sleeve.

As for utilities, they are going to keep raising rates regardless how cheap utility solar gets and regardless what happens with ITC. They may well choose to milk ITC in 2016 and ramp up utility solar. But if the stepdown happens, I think they'll go back to growing wind and shrinking gas, and utility solar at 10% ITC just won't have much of an advantage over wind. Wind, batteries and aging fossil plants is pretty much all a utility really needs. If wind and batteries can't lower residential rates, utility solar won't make a much of a difference either.

Utility scale solar won't shrink this year, that makes absolutely no sense at all as cost is significantly lower than last year. So I'm guessing that either your source is wrong or what might be more likely, most of this years capacity addition will come online in Q4 (historically a huge quarter). So like I said; residential solar has been growing faster than utility scale for the past few years (this year too), but the tide seems to be turning next year. Residential has been riding the very generous net metering policies for the past few years but these are being tightened as we speak.

Cheaper renewables and batteries for load balancing will lower utility rates, there is no way around it. Utilities have a fixed profit margin, they can't just bank the savings and keep the rate as is, and the savings will be there unless you believe that the decade old trend of wind+solar LCOE falling every single year will suddenly come to a halt. And that batteries are not cheaper than peaker plants for load balancing (I know you don't believe this to be true). The reason why utilities haven't lowered prices yes is because batteries have just now become cheaper than peaker plants, when Tesla starts pumping out the first packs (I assume next year) to the utilities (that have shown interest) the effect will start to come into play. On the wholesale price renewables are still a low percentage of the generation mix and is also just recently come down in price to a level where it is significantly cheaper than FF. Utility scale solar is around the same price as wind today, some places like the windy midwest wind is cheaper and in Nevada solar is cheaper which is why Tesla plans to power the Gigafactory with solar entirely. And the thing is that utility scale solar is still much earlier in its maturation process than wind so the LCOE reductions are happening much faster so your argument about utilities sticking with wind makes no sense.

@Foghat

If anything an ITC cut from 30% to 10% in 2017 as planned will pull demand forward to 2016 as solar will be more expensive after Dec 31 '16, if the ITC will be extended the 2016 demand will go down if anything.

 

[blakegallagher]

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.

 

[Foghat]

Perfectlogic, Solarcity customers pay $/kwh. It doesn't matter if ITC is 30%, 10%, or 0%. The only thing that matters if Solarcity offers a savings on monthly utility bill. So, if Solarcity can still offer an attractive savings on utility bill, then they will continue to have strong demand. If competitors can't offer the same value as Solarcity given the drop in ITC, then solarcity's demand becomes even greater.

The ITC, for Solarcity, really is a tax equity method to raise large sums of capital to fund extremely high growth. If that capital structure reduces, they have to make adjustments and 40% compounded growth as opposed 80% compounded growth is their answer.

70% of all residential solar is lease/ppa, so the mad rush to get the ITC before it goes down is just not happening with the majority of roof top solar customers.

 

[Perfectlogic]

Perfectlogic, Solarcity customers pay $/kwh. It doesn't matter if ITC is 30%, 10%, or 0%. The only thing that matters if Solarcity offers a savings on monthly utility bill. So, if Solarcity can still offer an attractive savings on utility bill, then they will continue to have strong demand. If competitors can't offer the same value as Solarcity given the drop in ITC, then solarcity's demand becomes even greater.

The ITC, for Solarcity, really is a tax equity method to raise large sums of capital to fund extremely high growth. If that capital structure reduces, they have to make adjustments and 40% compounded growth as opposed 80% compounded growth is their answer.

70% of all residential solar is lease/ppa, so the mad rush to get the ITC before it goes down is just not happening in roof top solar.

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.

 

[tftf]

Solarcity: Misunderstood And Undervalued - SolarCity Corp. (NASDAQ:SCTY) | Seeking Alpha

I don't always read articles on SeekingAlpha, but when I do, they're written by Sid Dalal. Nicely done, my friend.

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:

Siddharth (article author) wrote: "The conclusion to draw from this is that bigger losses now mean bigger profits in the future. For now, SolarCity is on the right path to an extremely bright future."

This path is full of peril. What if easy credit breaks down between today and "the future"?
SCTY is at the mercy of its creditors and low interest rates to keep the business model going - with complicated external factors such as subsidies and renewal rates 10-20 years in the future (very hard to model).

If everything were so simple every solar installer - that includes SCTY rivals such as SUNE/VSLR and soon RUN - would be a money printing machine.

History tells us otherwise. If something sounds too good to be true, it most often is.
Many retail investors seem to buy SCTY or TSLA stock because of the Elon Musk cult factor - without doing any fundamental homework.

Potential customers may finally wake up one day and do the math: Buying a solar system (especially with rapidly falling panel prices) is the better solution for most than overpaying for a solar lease for many years.

Remember that when the solar salesman rings at your door and promises you a "free" installation on your roof.

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.

 

[Foghat]

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.

Solarcity is reducing their own all in cost so that they can offer a compelling product without taking advantage of the 30% ITC. That's the point. The Solarcity customer does not use the ITC, they pay a $/kWh. Solarcity uses the ITC. They attract tax equity investors with the ITC. Again, Solarcity customers will not be rushing in to take advantage of the ITC before it drops, they will be looking at bottom line utility bill savings at the end of the month.

solarcity has to offer a compelling product for a $/kWh that consumers like despite the drop in ITC. That's the game everyone in solar has to do by the end of next year.

 

[Foghat]

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.

nothing has changed with the business model. The facts are facts. Real world people don't have the cash to buy up front. That's why they lease/ppa. They see a monthly savings without a single dollar invested. Again, 70% of all rooftop solar is lease ppa. Buying solar will have to be very cheap to compel the average American to get a loan for 1000s of dollars or pay cash. That's just the reality and the numbers continue to support that. Solarcity now has over 1GW of rooftop lease/ppas making monthly payments. That's the real situation of rooftop solar. It is not in dispute. Your comments on that article are not any more true today then they were then.

The stock is down because of guidance problems. Guidance problems create more uncertainty in an already uncertain industry for he average investor to make sense of. You have a high short interest because revenues are monthly over 20 year time periods and that doesn't look good on paper with high growth spending, even in a 1% penetrated market of rooftops. Net metering issues in the press also hurt investor perception. There are a lot of spin forces in addition to that from utility competitors as well as utility solar companies. However, even in this media/perception environment, Solarcity is drvining compounding growth, receiving the highest BBB ratings, getting thoroughly vetted by multiple rating agencies receiving investment grade ratings on their securitizations... Not to mention they now have over 14,000 employees and 300,000 customers in a little over 9 years of existence... Pretty crazy that we are talking about rooftop solar company at these numbers/scale.

if you think they are just s finance company, what do you call all the crews installing these systems and the 90 operation centers? What do you call their zep product manufacturing operation? What do you call their silveo manufacturing arm? All the software engineers? Energy storage engineers? Are these just another form of a banker or finance department? Come on now... Let's be real here

 

[Perfectlogic]

Solarcity is reducing their own all in cost so that they can offer a compelling product without taking advantage of the 30% ITC. That's the point. The Solarcity customer does not use the ITC, they pay a $/kWh. Solarcity uses the ITC. They attract tax equity investors with the ITC. Again, Solarcity customers will not be rushing in to take advantage of the ITC before it drops, they will be looking at bottom line utility bill savings at the end of the month.

solarcity has to offer a compelling product for a $/kWh that consumers like despite the drop in ITC. That's the game everyone in solar has to do by the end of next year.

If SCTY keeps their price the same in '17 after the ITC goes to 10% then sure customers wont care. But SCTY will still rush to eat as much of their backlog as possible as their margins will be higher in '16 compared to '17, they won't magically reduce cost 22% from Q4 '16 to Q1 '17.

 

[Foghat]

If SCTY keeps their price the same in '17 after the ITC goes to 10% then sure customers wont care. But SCTY will still rush to eat as much of their backlog as possible as their margins will be higher in '16 compared to '17, they won't magically reduce cost 22% from Q4 '16 to Q1 '17.

Solarcity stated in the conference call they will start pricing commercial installs under 2017 ITC starting as early as q2 2016 and q4 2016 for residential installs. So, they're going to start post ITC pricing as early as 6 months from now. You have to remember, ITC stipulations say the project has to commence install to qualify for the ITC. So, if install is not in progress, then no ITC. This pushes the "rush" to now(and within the next 6 months), which is much earlier then many assume.

However, there is legislation to change that stipulation in congress right now. There also is legislation for extending the ITC, so we'll see how that goes as well. It is definitely an industry in transition which adds to the market uncertainty and makes for a ripe short environment taking advantage of the investor/trader uncertainty while they can.

by the way, Solarcity is already at 1.92/watt install cost which is already at the target post ITC 2017 cost goal. The biggest cost cuts will now have to come from sales and marketing team growth reductions which they've already outlined reducing by approximately 50% over the course of 2016. Look at the all in cost break down again.

 

[Perfectlogic]

Solarcity stated in the conference call they will start pricing commercial installs under 2017 ITC starting as early as q2 2016 and q4 2016 for residential installs. So, they're going to start post ITC pricing as early as 6 months from now. You have to remember, ITC stipulations say the project has to commence install to qualify for the ITC. So, if install is not in progress, then no ITC. This pushes the "rush" to now(and within the next 6 months), which is much earlier then many assume.

However, there is legislation to change that stipulation in congress right now. There also is legislation for extending the ITC, so we'll see how that goes as well. It is definitely an industry in transition which adds to the market uncertainty and makes for a ripe short environment taking advantage of the investor/trader uncertainty while they can.

by the way, Solarcity is already at 1.92/watt install cost which is already at the target post ITC 2017 cost goal. The biggest cost cuts will now have to come from sales and marketing team growth reductions which they've already outlined reducing by approximately 50% over the course of 2016. Look at the all in cost break down again.

Have you forgotten your initial claim? You said that installations for '16 will go up if the ITC is continued, you still haven't made a single argument to back up this claim. The change in pricing happening 3/6 months before the year ending has no influence on '16 installations as they will happen in '17.

 

[Foghat]

Have you forgotten your initial claim? You said that installations for '16 will go up if the ITC is continued, you still haven't made a single argument to back up this claim. The change in pricing happening 3/6 months before the year ending has no influence on '16 installations as they will happen in '17.

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.