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Summary

  • Revenues climb as profits fall.
  • Debt remains reasonable, but client ratios show a mixed picture.
  • Short-term overvalued, long-term bullish.

SolarCity (NASDAQ:SCTY) fell 9.1% Wednesday when the company released its first quarter earnings report, but gained all of it back and then some Thursday on huge volume. Still, the stock has plummeted 22% in three months, and is down 37% from its highs in February 2014. Is this just a healthy correction from its outsized 400%+ gains from the IPO just 17 months ago? Or have we entered into a new lower trading range more in line with financial realities? This article will analyze current developments to this distinctive energy stock, and project where SolarCity should go from here.

SolarCity Revenues Climb as Profits Fall

SolarCity revenues have been steadily gaining for over a year. Revenues are up 34% from the previous quarter, and are more than double the same quarter last year. At the same time, net income has continued to deteriorate, with losses twice that of the previous quarter. Revenues are not the problem, it is the expense side of the ledger that is keeping SolarCity in the red.

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SolarCity Debt

SolarCity's long-term debt is at reasonable levels, and improved slightly this quarter. Total liabilities/total assets fell to less than a percent to 69%. The current ratio, looking at short-term liabilities and assets, deteriorated somewhat, and now hovers around 2.3.

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Comparing SolarCity debt levels to other industries poses a challenge because it is a hard company to categorize. We classify SolarCity primarily 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. Looking at debt for financial companies is different from other sectors because in many ways, their business is debt. Having said that, the chart below shows SolarCity's current ratio compared to other industries the company is commonly grouped under. The higher the number the better, so SolarCity debt remains under control.

SolarCity Client Ratios

The chart below shows ratios of revenues and expenses per customer for FY 2009 through 2013. 2014 ratios are projected using current rates of customer growth, revenues and expenses. The results show a mixed picture for SolarCity.

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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 an ample pace, which it has, falling total revenues per customer is not a grave concern.

Net revenues per customer, though still negative, have been steadily improving. In a company's early stages, net loss per customer should shrink as revenues grow. This has been the case through 2013, and should remain around the same level for 2014. I view this as a very positive sign: the more this trend stays on track, the sooner SolarCity becomes profitable.

On a more negative note, SolarCity's acquisition cost per customer has risen to over $2,700. It is still below 2010-2011 levels, but has not improved at the pace one would hope. This ratio must be kept under control as SolarCity's business model hinges on unremitting growth of its client base. Similarly, total expenses per customer are below 2010-2011 levels, but have basically flattened since then.

Glowing Profits or Wall Street Sunstroke?

There is much conflicting analysis of whether SolarCity remains a good investment, or will turn out to be a case of Wall Street sunstroke. I was concerned with projected time to profit for SolarCity in my previous article, and that bias remains. Total expenses per customer will need to drop significantly before SolarCity turns a profit, no matter how many customers they add. It could take several years before earnings turn positive.

On the other hand, SolarCity's business model aims to do just that, bring expenses way down. By recouping the investment in panels in 5-7 years, revenues will continue to flow at essentially no cost for as long as the lease lasts and as long as the sun shines. And if its projections are realized, straight-line growth could mean enormous profits in the future. SolarCity is likely overpriced at current levels, but I still remain bullish on SolarCity as a profitable long-term investment.

(click to enlarge)http://files.shareholder.com/downloads/AMDA-14LQRE/3155132261x0x752466/aea5396f-c8ad-44da-a0f0-37cf331778ec/SCTY%201Q14%20Earnings%20Presentation%20FINAL.pdf

Source: SolarCity Q1 2014 Earnings Conference Call

Source: Glowing Profits Or Wall Street Sunstroke: Is SolarCity's Correction Over?