Does SolarCity Have Existential Risk?

Solar PV installer SolarCity Corp. (NASDAQ: SCTY) reported a first-quarter adjusted diluted net loss per share of $2.56 on revenues of $122.6 million last week. In the year-ago quarter, the company reported a net loss per share of $1.52 on revenues of $67.48 million. The loss was wider than analysts expected, but what really slammed the stock price was the company’s guidance.

The company’s full-year forecast for new installations has dropped from a prior value of 1.25 gigawatts to a new range of 1.00 to 1.10 gigawatts. For the second quarter SolarCity expects to install 185 megawatts, a 2% decline compared with a year ago. The company now expects a net loss of $2.70 to $2.80 per share, well below the consensus estimate for a net loss of $2.13.

The reaction from analysts and investors was quick and sharp: shares dropped 25% almost immediately before recovering to a decline of around 17%. On Friday the stock was still down 13%.

Credit Suisse looked at the company’s results and said the weak guidance raised “existential questions” for the company. The analysts also offered more details on their decision to cut their price target from $62 to $38 on the stock while still maintaining their Outperform rating:

SolarCity seems to be faced with re-proving the merits of their business model each quarter – facing either operational, regulatory, capital, or competitive challenges – in addition to painfully, yet gradually, transitioning the strategy more towards value than growth, causing significant ownership rotation. … [The] magnitude of the bookings weakness and guidance cut, however, were both slightly more than we expected and the capital challenges facing the company will force investors to re-evaluate the merits, and valuation, of SCTY’s business.

[recirclink id=332051]
Merrill Lynch took a dimmer view, cutting its price objective to $24 a share and downgrading the stock from Buy to Neutral:

Mgmt lowered CY16 installation guidance to 1-1.1GW, lower than our below consensus estimate of 1.15GW. The solar industry’s long-term fundamentals remain promising, but we expect SCTY to be range-bound in the intermediate term.

S&P Global maintained its Hold rating on the stock, but chopped its price target from $25 to $21:

While bookings were very soft (down 33% yoy), due to regulatory issues among other factors, SCTY noted recent improvement. We think reaching cost targets and positive cash flow by year-end will be key. We view SCTY’s business as high risk given its need to continually raise capital.

Analysts at Oppenheimer cut their price target in half, from $54 to $27 with this comment:

With the reduction of guidance pointing to mid-teens [megawatt] growth Y/Y in context of the company reaching monetization levels which should generate cash by 2H:16, we believe SCTY shares are at a crossroad. We continue to see significant potential for spread capture in the residential solar business, but acknowledge lengthy capital recycling timelines and a challenged ability to forecast.

Other changes included:

• Baird cut its price target from $47 to $37 with a Neutral rating.
• JPMorgan cut its price target from $29 to $25.
• Raymond James lowered its price target from $60 to $50 but has a Strong Buy rating on the stock.
• Stifel cut its price target from $56 to $46.

Shares closed Friday at $19.60, up about 3.6% for the day, in a 52-week range of $16.31 to $63.12. The consensus price target on the stock is $31.00, although the recent changes may not yet be figured in.