Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

If you needed any further convincing that SolarCity's shareholders will accept Tesla Motors' lowball takeover offer, then Tuesday night's results release should do it.

SolarCity did actually report a slightly smaller loss than Wall Street expected. But earnings aren't the main event here. The three things that matter are installations, costs and cash.

SolarCity had already warned at the start of the month -- on the same day Tesla finalized its offer -- that while it beat its guidance for installations for the second quarter, it was taking the axe to full-year targets. On Tuesday, it announced third-quarter guidance of just 170 megawatts -- or down a third from a year earlier. That means SolarCity would have to hit it out of the park, over a river, and land it in a cup of water in the fourth quarter to meet even its reduced full-year numbers.

Christmas!
A sharp drop in installations mean SolarCity needs a miraculous turnaround in the fourth quarter
Source: The company
Note: Figures for 3Q and 4Q 2016 are company guidance. Figure for 4Q 2016 is the mid-point of a range, 315 MW to 415 MW.

SolarCity expects a strong showing on its commercial and industrial side will get it there at the end of the year -- not terribly reassuring, given its recent track record on hitting targets.

Installing fewer panels has made it harder for SolarCity to address its big problem: stubbornly high unit costs. You may recall it was the company's desire to squeeze these down that led to its strategic reset on growth late last year. Since then, reining in growth hasn't been a problem, but the costs haven't really followed.

Stuck In The City
SolarCity's cost to deploy each watt of solar power is back to where it was in early 2014
Source: The company

And costs have compounded the existential issue for SolarCity: cash. It is a measure of how sensitive a topic this is that SolarCity actually provided a figure for how much cash it had in the bank as of the close of Monday -- $215 million -- to show it was higher than the quarter-end figure, which was very low.

Cash Is (Sin)king
SolarCity's cash balance at the end of June was less than a third the level of a year earlier
Source: The company
Note: Net debt figures include convertible debt.

SolarCity blamed the rapid burn in the second quarter in part on Tesla's initial takeover announcement, saying it complicated getting some financing in the door by the end of June.

But that takeover offer is a lifeline, albeit a qualified one. Until Tesla made its announcement, SolarCity's stock had joined its peers in a downhill run this year.

Wet Summer
Until Tesla's initial takeover announcement, SolarCity 's stock was in the middle of a mediocre pack
Source: Bloomberg
Note: Indexed to 100.

Spot the difference since Tesla stepped in.

Thanks Elon
Linking SolarCity's stock to Tesla's via the latter's all-stock offer has pulled it out of the pack
Source: Bloomberg
Note: Indexed to 100.

SolarCity's stock barely budged in trading after hours on Tuesday, despite its weak guidance (the fourth-quarter earnings range was also below where Bloomberg has the consensus estimate pegged).

And this is the irony of these numbers. As I wrote last week, Tesla's earnings hardly matter anymore -- it's all about the vision. Now that SolarCity's stock is a function of Tesla's, the solar leasing company's numbers don't matter anymore, either.

That herculean target for deploying panels in the fourth quarter, for example, will start to fade in the collective mind once SolarCity becomes a subsidiary of Tesla -- which is scheduled to happen later this year. Ditto for SolarCity's objective of positioning itself "to report one of the lowest Cost per Watt in our history in the fourth quarter of 2016," given it likely won't make that report as a separate company. For SolarCity's shareholders, who will likely soon own Tesla stock, their former company will be but one small part of Elon Musk's much broader ambition.

The one constituency who should be taking notice are Tesla's shareholders themselves. Even if they choose to vote for the SolarCity deal, the lack of growth, stubborn costs, and swollen net debt evident in the target's latest numbers are stark evidence of the risk they are taking on.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net