SolarCity's Shifting Strategy Spurs Business Model Questions

  • SolarCity reduced panel-installation forecast for 2016
  • `Wall Street thinks it's way too complicated,' analyst says

“What is SolarCity?”

The question, from Ben Kallo, an analyst at Robert Baird & Co., came after SolarCity Corp. pulled back its installation estimate for the third time in seven months, following a sharp slowdown in new orders, and announced a loan program for residential solar customers.

Those are significant shifts for SolarCity, which became the biggest U.S. rooftop installer by promoting leases and pursuing growth at any cost. Analysts have become frustrated trying to keep pace with the changes in strategy and revised forecasts. The shares fell 21 percent to $17.82 at the close in New York., the most in three months.

“Wall Street thinks it’s way too complicated,” Kallo said during a conference call Monday, after SolarCity released its first-quarter results.

The company is going in multiple directions, making it hard for observers to keep track of its strategic goals, Kallo said in a research note Tuesday. “Management has ruined its credibility for now.”

Lower Forecast

SolarCity expects to install about 1 gigawatt of panels this year, about 15 percent more than last year, according to a statement Monday. That’s down from February, when the San Mateo, California-based company forecast about 40 percent growth. And in October it reduced 2015 installation guidance and announced a strategic shift that called for slower expansion in an effort to become cash-flow positive by year-end.

New orders in the first quarter were 160 megawatts, about half of the 310 megawatts management anticipated. That’s “alarmingly weak,” according to Patrick Jobin, an analyst at Credit Suisse Group AG. He has the equivalent of a buy on the shares and reduced his price target Tuesday to $38 from $62.

“Another quarter of lowering expectations and pricing assets at a lower level is effectively proving the bear argument,” Jobin said in an interview. Some of the lost business may have been opportunistic, with management taking an opportunity to “flush out some existing backlog” knowing they were already going to miss bookings guidance.

Solar Leases

SolarCity began life as a solar installer, putting panels on rooftops. It later picked up on the little-or-no-money down leasing model, promoting them as an easy way for consumers to get solar power.

In a shift, the company last week began offering another financing service, a simple loan that runs for 10 to 30 years, after scrapping another home-lending service in the first quarter that the company said was confusing to some customers. That means that company no longer would be the owner of the panels.

For Chief Executive Officer Lyndon Rive, it all comes down to making solar power accessible.

“The business model is to provide energy at a lower cost than you can get it today from fossil fuel,” Rive said during the call. “There are many different products our customers want. Some customers prefer power-purchase agreements, some prefer leases, and we’ve seen a growing demand for customers who want to own their equipment.”

Losing Money

The strategic shifts are part of SolarCity’s effort to become cash-flow positive. The company has lost money in all but three quarters since its initial public offering in December 2012, as it poured money into more installations.

It reported a first-quarter loss of $25 million, or 25 cents a share, wider than the year-earlier loss of $21.5 million, or 22 cents. Excluding some items, the loss was $2.56 a share, more than the $2.31 average of 17 analysts’ estimates compiled by Bloomberg. Sales rose to $123 million from $67.5 million.

Costs increased 19 percent from the fourth quarter to $3.18 a watt, according to the statement. The company installed 214 megawatts of panels in the first quarter, exceeding its February forecast of 180 megawatts. That’s down from 272 megawatts in the fourth quarter, partly because of its decision to exit the Nevada market, where regulatory changes made solar rooftops uneconomic.

“Their costs went up significantly, and that’s not a good trend,” Andrew Bischof, an analyst at Morningstar Inc., said in a phone interview. Reducing installation guidance for the year and having costs come in higher raise concerns. “The market discounts constantly changing targets.”

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