Could you please share your pricing model with us. I'm interested to see how you arrived at that conclusion.
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Could you please share your pricing model with us. I'm interested to see how you arrived at that conclusion.
I think the best comparable for SCTY's valuation is a company like Just Energy, or other energy/ natural gas retailers.
Just Energy is an extremely interesting company, who have a business model quite similar to SCTY however they add much less value, and their contracts only last max 5 years (for energy), they also do waterheaters, and 'green energy', among other business's, however I think if you break down the books of JE you will learn how favorable the market can be to companies like this. I also think in 5+ years when SCTY is done growing they will have the ability to pay a nice dividend.
Here's an excerpt of Fortune magazine interview with Lyndon Rive from Mar 2013:
Adam Lashinsky: Could you meet your growth targets if government incentives went away tomorrow?
Lyndon Rive: If it went away tomorrow, no. So today there is a 30% tax credit that expires -- or it doesn't expire. It goes from 30% down to 10% in 2017.
Adam Lashinsky: That's a federal tax credit?
Lyndon Rive: Federal tax credit. And then it goes down to 10%, which is the same tax credit that fossil fuel gets. And so then it falls into that category. It's insane that it has the same tax credit as a polluting fuel source. Beside the point, we have a clear cost reduction map to make sure that by 2017 we can continue to offer cheaper clean electricity without the 30% tax incentive.
SolarCity CEO talks the future of solar power - Fortune Tech
Adam Lashinsky: Could you meet your growth targets if government incentives went away tomorrow?
Lyndon Rive: If it went away tomorrow, no. So today there is a 30% tax credit that expires -- or it doesn't expire. It goes from 30% down to 10% in 2017.
Adam Lashinsky: That's a federal tax credit?
Lyndon Rive: Federal tax credit. And then it goes down to 10%, which is the same tax credit that fossil fuel gets. And so then it falls into that category. It's insane that it has the same tax credit as a polluting fuel source. Beside the point, we have a clear cost reduction map to make sure that by 2017 we can continue to offer cheaper clean electricity without the 30% tax incentive.
SolarCity CEO talks the future of solar power - Fortune Tech
Thanks for the videos.
Why is that SCTY was able to grow despite the anti-dumping duties?
Duties have not been scaled back and will not be scaled back for another 2.75 years at least.
Of course SCTY will survive even if you take away the 30% tax credit, because costs of solar are coming down quickly. But you are ignoring the 800 lb. gorilla with all of these posts...
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Why do you think that they were able to grow despite the anti-dumping tariffs?
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I am not sure if you are alluding to something specific or if you are asking a general question. In any case, here are my observations.
1) The all-in-costs for install has progressively/continuously went down over years.
a) Due to lower panel prices in the market. In the Fortune interview I posted earlier there is a bit about it.
b) Due to scale, as mentioned by Bob Kelly over quarterly presentations
Point-a is less relevant to last year or so because panel prices stabilized. From now on it's mostly going to be point-b.
This scale thing will continually work in their favor as they are becoming ever bigger. Effectively they have a virtuous cycle going on here.
2) SolarCity's customers in general are very satisfied with them. As mentioned in that other 20min video I posted, the number-1 source of customers is existing customer referrals. So the brand is getting ever powerful, creating a viral effect.
3) People like the Lease/PPA model. You can see it in all the posts here. Except you and shadows noone is vouching for outright purchases.
4) SolarCity, again through economies of scale in Finance, is able to procure lowest cost capital. Their credit spreads are continually decreasing and there is further room to drop. Especially looking at the default rates on their contracts (it's lower than prime-mortgages, see the latest presentation on their investors website).
There might be a few others that I am missing.
What are your thoughts on this? I will really appreciate a detailed analysis if you have time for it. I see that you are somewhat bearish on solar city. I want to better understand why. Thanks
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5) The recent acquisitions of Paramount and Zep should provide tremendous value in lowering acquisitions costs and installation costs. We don't have any numbers related to acquisition cost savings but we already know through Zep productivity more than doubled. This will create a very big impact over financials going forward.
6) Incredibly sharp management team. Rive brothers are serial entrepreneurs. Separately, in many early Elon Musk videos on YouTube he explained why he thought Rive brothers were most suited to take up the challenge of building SolarCity. Musk knows what he is doing.
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I would rather lease than purchase. If one can afford it/get a loan then financially it makes more sense to buy it, especially if you can get a big enough system to be able to get off the grid.
As evidenced by leasing vehicles, the leasing model is very popular because of minimal out of pocket costs. Thus, I can see why the SCity model should do well. I do have money in SCity so I would like to see it succeed. However, if I go with solar (and I intend to in the future) I will probably buy the system. I will do my DD on the purchase and if SCity can give me the best price/warranty then I would buy from them.
HenryF, get info, thanks for joining the conversation. First video interview you posted was where I started my research stint before deciding to eventually invest on IPO day incidentally...
Only thing I can add is since the panel prices have stabilized, they've actually accelerated their cost reduction. Oddly enough, margin have gone down as well... Acquisitions closed later in the year and seems to be where most of the cost reductions have occurred as well. Your points on this are well taken. Also your scaling point makes sense too.
Given the net metering problems looming, how do you think they will continue to reduce costs and keep cheaper rates for customers and new customers? Thx
Only thing I can add is since the panel prices have stabilized, they've actually accelerated their cost reduction. Oddly enough, margin have gone down as well... Acquisitions closed later in the year and seems to be where most of the cost reductions have occurred as well. Your points on this are well taken. Also your scaling point makes sense too.
Given the net metering problems looming, how do you think they will continue to reduce costs and keep cheaper rates for customers and new customers? Thx
I think I get what you are alluding to. Last time around SolarCity exploited a loophole to ship from Taiwan. This time SolarWorld is trying to close that loophole. So they may be left with no choice but to pay more for panels.
This is my take on that. As someone already pointed out earlier in this thread:
a) Management is still exploring ways to get around it or deal with it.
b) They promised overall costs will still decline even if panel costs go up.
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Thanks for your response, and I agree with most of the positives that you mentioned on SCTY. I am not bearish on SCTY: I think that the most likely outcome will be success for them. But I am just worried that there are huge risks that are ignored by most of its investors. I would put the odds at 70% for SCTY to yield a lot better than 10% average return over the next few years, but I think there is a 30% chance that it underperforms if one or a few of these risks materialize.
I am asking a general question, you made a very long post and I still haven't gotten the answer I was looking for.
I am asking why didn't the anti-dumping tariffs have any affect on SCTY last time?
It is a straightforward question with a very simple answer...
In your first post, you just brushed off the anti-dumping case that is going on like it is no big deal, because last time it wasn't.
I think that if you understood why the last time it didn't cause any inconvenience, then you would understand that this time it could potentially cause a big inconvenience to SCTY.
I think that in the end there will be some kind of negotiated solution that will still cause SCTY some inconvenience; unlike last time, where those tariffs had virtually zero effect.
But that could be just wishful thinking on my part, and if there isn't no negotiated solution then it will become a major inconvenience for SCTY as well as the other Chinese solar companies that I invest in.
So I was just asking a general question: why didn't the last round of anti-dumping duties cause any inconvenience to SCTY?
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Yes, this is what I was looking for.
If the Chinese are hit with duties then the Chinese stocks will get hit, but I think that SCTY will be hurt the most by this decision by far. If they get hit with 30% - 60% tariffs then those costs are directly born by SCTY if they still want to source from China. It could be a problem of supply and/or quality if they start sourcing from another country.
The Chinese can easily ship to other countries than the US if these tariffs are implemented. While SCTY may have a hard time sourcing from elsewhere.
But like I said, I believe that there will be a negotiated solution that will be similar to China-EU deal and involve a minimum selling price. So this scenario would still hurt SCTY's margins, but would improve the Chinese solar stocks significantly.
So I see this Solarworld case as a lose-lose for SCTY. While it can be a loss or a win for Chinese stocks, and my guess would be that it becomes a win, because nobody wins trade wars and both countries just agreed to working on improving free trade between themselves.
So for those reasons I don't invest in SCTY in the short run. But I have previously said in this thread why I am not investing for the long haul. I think that the reward in SCTY can be very high, but the risks are higher than what I like. For those reasons I have other stocks that I prefer in the solar sector. I am more of a value investor and would rather go with someone that I perceive as undervalued.
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I have seen at least a couple people say that they see nothing but good reviews, but SCTY just like most other companies has plenty of bad reviews on-line, just go to Yelp.
Sleepyhead, Thanks for explaining your position. Here is some potential positive news (futureproof posted this earlier):
China, U.S. may be close to a trade deal to end solar panel disputes CCTV News - CNTV English
I don't have exact stats with me, but from what I remember, panel costs are a small chunk compared to everything else in SolarCity's business. There is labour costs, r&d, customer acquisition costs, sales and marketing, and administration costs. Again, Management promised lowering of total costs even if panel prices go up.
I believe tslafan123 is on to something with his observations into the Financial reports. Income Statement and CashFlow Statements are completely useless in valuing SolarCity.
Just think about how many moving pieces they have in them: some numbers are outright purchases, some are leases, some are ppa's.
Each of them having completely different cash-flow/revenue recognition timelines and seasonalities.
Outright purchases, esp commercial installations have seasonality associated with calendar years (Q4 is strongest).
PPA's have seasonality associated with summers.
In Leases/PPA's revenue is recognized over 30 years but cost is amortized over 20 years.
Most importantly SGA expenses are NOT amortized over time. This creates a massive distortion.
Overall there is no real way to value this company using income statements or cash-flow statements.
Balance Sheet on the other hand pulls everything into present. They are recording their contracts under assets and debt they are taking on under liabilities. So the Book Value is pure and growth in Book Value represents true growth of this company.
If you look at the numbers closely, literally only this year's guidance is baked into the current price. This company is severely undervalued given it's growth potential. I honestly see a multi bagger. 5 to 10 fold increase over next 5 years.
It's undervalued because most people are confused by the income statement (revenues/earnings). Or they just give up and move on saying it's too complicated.
This company is a true hidden gem. Well, not really. It's a rare precious stone which is on full display (thanks to Musk) but nobody knows how to value it. For an example look at futureproof's hilarious account of CNBC video clip of Greenberg.
China, U.S. may be close to a trade deal to end solar panel disputes CCTV News - CNTV English
I don't have exact stats with me, but from what I remember, panel costs are a small chunk compared to everything else in SolarCity's business. There is labour costs, r&d, customer acquisition costs, sales and marketing, and administration costs. Again, Management promised lowering of total costs even if panel prices go up.
I believe tslafan123 is on to something with his observations into the Financial reports. Income Statement and CashFlow Statements are completely useless in valuing SolarCity.
Just think about how many moving pieces they have in them: some numbers are outright purchases, some are leases, some are ppa's.
Each of them having completely different cash-flow/revenue recognition timelines and seasonalities.
Outright purchases, esp commercial installations have seasonality associated with calendar years (Q4 is strongest).
PPA's have seasonality associated with summers.
In Leases/PPA's revenue is recognized over 30 years but cost is amortized over 20 years.
Most importantly SGA expenses are NOT amortized over time. This creates a massive distortion.
Overall there is no real way to value this company using income statements or cash-flow statements.
Balance Sheet on the other hand pulls everything into present. They are recording their contracts under assets and debt they are taking on under liabilities. So the Book Value is pure and growth in Book Value represents true growth of this company.
If you look at the numbers closely, literally only this year's guidance is baked into the current price. This company is severely undervalued given it's growth potential. I honestly see a multi bagger. 5 to 10 fold increase over next 5 years.
It's undervalued because most people are confused by the income statement (revenues/earnings). Or they just give up and move on saying it's too complicated.
This company is a true hidden gem. Well, not really. It's a rare precious stone which is on full display (thanks to Musk) but nobody knows how to value it. For an example look at futureproof's hilarious account of CNBC video clip of Greenberg.
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California Public Utility Commission sets 20 year life on net-metering:
Net Metering Gets 20-Year Reprieve
Net Metering Gets 20-Year Reprieve
Pretty soon batteries will be the only saving grace in this industry. SolarCity is best positioned to deal with this. Probably the only company properly positioned to deal with this. I just can't see how all other competitors won't get wiped out.
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If I understood this correct then anyone who gets a solar system in California after June 2017 will not get net metering for 20 years; but instead will get whatever the rules are in place, which will be determined in the future?
It sounds like more uncertainty which I don't like. But in the mean time, this will lead to a solar gold rush in 2015 - 2016, before tax credit expires and net metering does too; at least in California.
Good times ahead for solar over the next two years. There is going to be a huge push and all solar companies are going to be very profitable soon.
After 2016, I feel that everyone will get the price of solar down 30% - 60% from 2013 and subsidies will not be necessary, at least to build power plants or commercial rooftops. The problem will be with residential if net metering goes away.
The solution would be battery storage, but I fear that it might not be widespread by 2017. I hope that it is, but even if it is available it becomes an added cost that lowers attractiveness for solar.
The net metering system is really a great system for current solar customers. I can see why utilities get upset about it, but they are completely ignoring the fact that solar customers add a lot of benefit to transmission services companies. Solar helps offset peak load and that helps out the electric customers as well, since they do not have to build out new capacity and pay for it.
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Their book value is still under $500m and half of that just came from a secondary offering, so without it we would be looking at $250m in book value vs. a $5b market cap.
You are referring to growth in assets, but that is accompanied with growth in liabilities, so I would not use that to value the company.
I still think that it has a long way to grow before justifying its current valuation. We are pricing in 2016 or maybe 2017 results already if it can keep growing at a rapid pace. But I think that growing pains will ensue if they try to grow 100% for a few more years. I think that they can't keep that pace of growth for too long, before quality of service goes down the drain.
Thanks for the link. Should be good news for all solars. In reading the blog it appears the net metering situation will change in July 2017 or when 5% of the energy is generated by these systems. Solar is not that big on the east coast (mid Atlantic to New England) at this point. Any chance that California will reach the 5% cut off before July 2017 and doesn't that give incentive for people to put in systems asap to avoid the 5% being met before the calendar deadline?
Our numbers are off at various levels.
Just to begin with: In the latest 10K document, page 80, I see this:
Total assets $2,809,534
Total liabilities $1,960,410
Total equity $804,415
Total liabilities and equity $ 2,809,534
I considered the $804Mil to be Book Value.
Where are you seeing under $500Mil Book Value?
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My understanding is that SCTY is not demand constrained, but rather constrained by their inability to grow faster than they are already growing (which is very quick).
If anything, I don't see how this is going to help SCTY since they said that they have enough demand for the next 10 years IIRC. I think that this will provide a huge boost to the local installers and it sounds like it is a good time to be an installer.
This news came out during trading hours on Friday. SCTY did not react to this news and just kind of followed the market, so I don't think that it will have any affect on the stock in the short run.
Getting to the next steps. In the same page 80, I see Total Equity (which is Assets - Liabilities) grow from $280Mil in 2012 to $804Mil in 2013.
If I further normalize with Shares Outstanding at the end of each period, I get Book Value per Share of $3.74 at end of 2012 and $8.83 at end of 2013.
That is a growth of 136% over one year.
Sleepyhead, are you good so far with this?
I was looking at the last Q on WSJ.com and it was for Q3 (I guess because they delayed financials so many times that WSJ does not have theirs updated, and I assumed it was last Q).
I still do not agree with your valuation though; the 500MW they install this year is not good for a $5b valuation, it is nowhere near close. But in the mean time I don't think that SCTY can reach a $600 in 5 years. There is no way that happens.
I also disagree with what you said about only me and Theshadows being the only ones saying that buying is way better than leasing.
Most people that go into solar do it to produce their own energy and not to have to pay a second utility aka SCTY. I still think that you will find plenty of people willing to pay a second utility and that SCTY's business model is capable of getting a ton of customers; but I would say that the vast majority would definitely rather buy than lease a system for various reasons, unless they really can't for financial reasons.
I already said everything I had to say on sale vs. lease, so I am not debating this anymore; just don't like how included me when bringing up the topic, so I had to comment and firmly disagree with what you said, but I digress...
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