Seeking Alpha
Long only, mutual fund analyst, ETF investing, energy
Profile| Send Message|
( followers)  

Summary

  • The most recent financial for SolarCity show a mixed picture.
  • SolarCity debt levels are reasonable, depending on how you classify it.
  • Client growth is brisk, but needs to farther.

Does SolarCity (NASDAQ:SCTY) look like a good investment at current prices? The most recent financials released by SCTY fills out the picture of how this unique company performed for 2013. Do the numbers justify the outsized stock performance, which has risen 222% in the past 12 months, and 384% since its Initial Public Offering in December 2012? Or on the other hand, are recent filings more reflective of the 42% drop since the highs of a month ago? This article will follow the data to see where this distinctive energy stock stands now, and forecast where this dynamic solar company may go from here.

(click to enlarge)

Figure 1.SolarCity Revenues.

SolarCity Revenues Are Climbing…

First the good news: sales have been steadily gaining for SCTY. Figure 1 shows that sales, or revenues, are up 29% from 2012 levels, and almost triple what they were in 2011. Revenues came in at the high end of projections made in November 2013. Gross profits, accounting costs of revenue such as operating leases, incentives and sales (but not expenses or other losses), have also been growing.

…But Profits Are Falling

Profits for the company, however, are a different story. Figure 2 shows that net losses have been growing, over double now what they were in 2011. Figure 1 points out that revenues are not the problem, it is the expense side of the ledger keeping the company in the red. This divergence between revenues and net income, can clearly be seen on a quarterly basis in Figure 3.

(click to enlarge)

Figure 2. SolarCity Losses.

(click to enlarge)

Figure 3. SolarCity quarterly revenue and income.

Classifying SolarCity Debt

It is always beneficial to look at debt when evaluating a company's financial health. When debt ratios are compared to industry-wide levels, a clearer picture emerges of whether a company is successfully deploying debt, or if it is swimming in financial liabilities.

(click to enlarge)

Figure 4. SolarCity total liabilities to total assets.

(click to enlarge)

Figure 5. SolaCity current ratio.

This type of comparison poses a challenge for SolarCity, because it is a hard company to classify. Most financial websites mistakenly put SCTY in the semiconductor industry, since the majority of solar companies are in this business sector. The SEC classifies SolarCity in Construction Special Trade Contractors which is partially true, but does not fully cover its business model.

I see SolarCity more as a financial company, because of the way it interacts with its clients through financing, lease arrangements, notes, etc, and how those instruments appear on the liability side of its balance sheet. Additionally, looking at debt for financial companies is different from other sectors. In many ways, their business is debt. This is all the more reason why classifying SCTY correctly is important when making industry comparisons.

Figures 4 and 5 show how SCTY stacks up against debt levels of the industries mentioned above. The ratio of total liabilities/total assets has been consistent for SolarCity over the years, and came down slightly in 2013. Though SCTY is higher than semiconductors and construction services, it is well below the average for the financial sector. The current ratio is a measure of a company's shorter-term debt, and the higher the number the better. On this measure, SolarCity appears to be more of concern when compared to industry averages.

SolarCity Client Growth

Despite the difficulties outlined above, there is much that SolarCity has been doing right. Figure 6 shows how SCTY has been successfully executing its business plan by growing its customer base at an extremely rapid pace. Keeping up this growth is essential to becoming profitable, and SCTY shows no signs of slowing its expansion.

(click to enlarge)

Figure 6. SolarCity client growth.

If you dig in to these numbers more deeply, however, a mixed story again emerges. As seen in Figure 7, total revenues per customer have been steadily declining. This is to be expected. As SolarCity moves more and more into home and small business installations, revenues per customer get diluted when compared to its larger utility-scale clients. So long as client growth continues at a decent pace, falling total revenues per customer is not a grave concern.

(click to enlarge)

Figure 7. SolarCity client ratios.

Net revenues per customer have also been improving for SCTY. In a company's early stages, net loss per customer should shrink as revenues grow. This has been the case, with levels in 2013 about 31% better than 2012. It is crucial that this ratio continue to improve if SCTY hopes to get in the black in a timely fashion.

A key way to see how this is progressing is to watch SolarCity's acquisition cost per customer. This ratio has been shrinking, but not at the pace one would hope. In fact, in 2013 acquisition cost per customer seems to have stabilized at 2012 levels. I will be watching this number very closely to evaluate when, or whether, SCTY will be on track to turn a profit.

Overpriced or Opportunity?

Without having access to SolarCity's inner cogs, my back of the envelope calculations show that the company may be many years out until it enters into positive earnings territory. If total revenues per customer levels out in the $1,500 range, and operating expenses stay at current levels, then SolarCity will need to double the +/-100,000 clients that it currently has before it turns a profit. Even at the current rapid rate of client growth, it would take SolarCity two years to get to the 200,000-client level.

SolarCity has a lot of moving parts, so it is surely possible that revenues could advance quicker than my estimates, and/or expenses could become much tamer. In addition, SolarCity's business model is quickly evolving, so unknown developments may greatly change its financial landscape. SolarCity is likely priced to perfection at current levels, but I would not discount this company as a profitable long-term investment.

Source: SolarCity: Overpriced Or Opportunity?