Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

SolarCity (SCTY) made its public debut on Thursday, December 13th. Shares of the solar installation firm ended their first day with gains of 47.4% at $11.79 per share.

The Public Offering

SolarCity sells renewable energy to customers at below utility rates. The "solar" firm, founded in 2006, provides solar-generated energy to prices below utility rates in long term agreements with its customers. The company appeals to customers with its "better energy" platform which lowers energy costs, focuses on long term relationships, on a high quality basis.

The firm is not a traditional solar manufacturer, but simply installs solar panels. The users will not acquire the panels, but simply pay a monthly fee for the lease, while paying less for their energy.

SolarCity sold 11.5 million shares for $8 a piece. SolarCity raised $92 million in gross proceeds in the offering process. Based on the offer price of $8.00, the company is valued at roughly $574 million. Less than 1% of the proceeds will go to selling shareholders.

The offering was very disappointing. The offer price was set far below the preliminary $13.00-$15.00 price range set by the firm and its bankers. In total, 16% of the company's shares outstanding were offered. At Friday's closing price of $11.72 per share, the firm is valued at $840 million.

The major banks that brought the company public were Goldman Sachs, Credit Suisse, Bank of America/Merrill Lynch, Needham & Company and Roth Capital Partners.

Valuation

SolarCity currently serves its customers in 14 states and the company has international expansion plans. Besides residential companies, SolarCity also serves major commercial companies including Wal-Mart (WMT), eBay (EBAY) and Intel (INTC). Since its inception the firm has provided its services to over 45,000 buildings.

The company reported annual revenues of $59.6 million for 2011. The company reported a net loss of $73.7 million for the year. The company reported a net profit of $43.5 million, attributable to its shareholders, after reporting a $117.2 million loss to non-controlling interests.

For the first nine months of 2012, SolarCity generated revenues of $103.4 million, up 166.5% on the year before. Net losses increased from $56.7 million in the first nine months of last year, to $78.0 million in the first nine months of 2012.

SolarCity expects to receive roughly $92 million in gross proceeds from the offering, or roughly $83 million in net proceeds. The company has not earmarked the use of the proceeds. SolarCity intends to use the proceeds for general corporate purposes, including possible acquisitions or investments in new technologies.

Based on Friday's valuation of $840 million, the market values the firm at 5.8 times 2012s expected annual revenues of $145 million. The company is expected to report a large loss again, possibly surpassing the $100 million mark for the year.

Investment Thesis

As noted above, the offering of SolarCity has not been a great success despite the strong first day return. While shares are trading 46.5% above the offer price of $8.00, they are still trading some 16% below the midpoint of the preliminary offer range of $13-$15 per share.

The sentiment around the offering has not been very good. Solar companies have seen tough times as they face strong competition from Chinese competitors who allegedly receive illegal subsidies. At the same time, governments in many developed nations are cutting back on subsidies for the sector as part of their austerity measures.

Investors are relieved despite the dramatic discounted offer size. It is a vote of confidence that many venture-capital based backers are actually increasing their stake at the offering. Prominent investors in the firm include Elon Musk, founder of Tesla Motors (TSLA), who will hold a 28.4% stake in the company after buying $15 million more shares in the offering. Shares of other solar companies including First Solar (FSLR) have tripled from their lows in the summer.

According to Reuters, CEO Rive is disappointed in the offering and investors risk tolerance in the current market:

We don't manufacture equipment, we sell cheaper clean energy. I thought that would be enough to convince investors to look at the fundamentals of the business. Investor appetite for risk in the clean-tech sector is extremely small.

Despite the sizable discount, the sentiment surrounding the offering has improved. Shares rose almost 50% from their discounted offer price on signs of insider buying and continued aligned incentives.

Still there are significant risks attached to the valuation of the firm. The company lost 75 cents on each dollar of revenue generated so far in 2012. At the same time, the revenue multiple of almost 6 times for the full year is a bit rich as well, given the uncertain margin developments.

I find it very hard to judge what "sustainable" margins could look like in the medium term. The potential operating margins for the firm depend on a range of items including subsidies, energy substitutes, sales leverage and technology developments.

For the reason mentioned above, I remain on the sidelines.

Source: SolarCity - Shares Of This Solar Offering Bounce Back After A 42% Discount