Shares of SolarCity Are Essentially Worthless

| About: SolarCity Corp. (SCTY)

Summary

The death of the MyPower product line is now official.

We do not believe the market understands the implications of this situation.

While SolarCity might deliver flat to slight growth in MW, we believe 2016 could see its first declining year of revenues.

We recently wrote about the MyPower product line at SolarCity (NASDAQ:SCTY) and how the company was selling that product for pennies on the dollar. A reader, UpBeatnik, has brought it to our attention that MyPower has officially been taken off the SolarCity website as of Feb. 15, 2016. Since then, GreenTechMedia published a story confirming this development. The stock, interestingly, has traded well over the last week.

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In this article, we discuss the implication of this confirmed change to SolarCity's prospects. We note that the death of this product, as well as the company's commentary in the GreenTechMedia article, validates our long held view on how poor this product really is. As one example, investors should note the following snippet from the GreenTechMedia article:

It wasn't the forking over of the tax credit that was the chief problem, however, [CEO Lyndon] Rive told GTM. Instead, it was the fact that many of SolarCity's customers did not qualify for the 30 percent Investment Tax Credit. "In hindsight, I definitely underestimated that," he said.

Firstly, this statement supports our contention that forking over tax credits as well as not having enough taxable income are problems for this product. In this context, it is ironic that the company markets these loans to investors as high-quality loans with performance superior to prime mortgages. Far from being high quality, SolarCity's loans to people without sufficient taxable income are akin to the much abused no-doc loans from the early 2000s that led to the mortgage bubble. We expect defaults from this pool of assets to far exceed any forecasts from the company.

We have also maintained that these loans do not fare well when compared to other loan products. Investors who have argued otherwise should note the following comment from the GTM article:

Lastly, another solar marketplace, Pick My Solar, found that the cost of MyPower for the average California customer was simply far more expensive than other options in the market.

As noted elsewhere in the GreenTechMedia article, the landscape in residential solar finance is changing rapidly. Loans are becoming increasingly popular with home owners as they are typically much more sensible financing options. If anything, we believe GreenTechMedia Research underestimates the trend toward loan products. We expect the market to move much more rapidly from TPO (thermoplastic polyolefin) products than what GreenTechMedia Research suggests.

Even if one were to subscribe to GreenTechMedia Research's numbers, only 57% of the market in 2016 is estimated to TPO products. In effect, the total available market for TPO products sold by SolarCity, SunRun (NASDAQ:RUN), Vivint Solar (NYSE:VSLR) and SunEdison (SUNE) is not growing as rapidly as the overall market. In this maturing residential solar market, SolarCity is desperately in need of a loan product.

Unfortunately for SolarCity's shareholders, this is not a winnable game for the company. Banks, with their tremendous cost of capital advantage compared to companies like SolarCity, will always offer superior and lower interest rate products. If and when SolarCity releases its new loan product, it is effectively doomed to be uncompetitive right off the bat.

While SolarCity's Q1 guidance likely comprehends the loss of the MyPower product line for the quarter, we believe the 2016 guidance is based on optimism about a new loan product that does not exist today and a product that will not be competitive when released. The other major challenge for SolarCity is that any new product that it comes out with is likely to have far worse theoretical IRR and NPV than the products it currently markets.

When coupled with the fact that the incremental growth is likely to driven by the lower ASP commercial business and uncompetitive loan product, it no longer makes sense for investors to measure SolarCity by MW growth. Given the dynamics, we expect revenue growth to significantly lag MW growth. In fact, we believe there is a significant likelihood that 2016 will be a negative revenue growth year for SolarCity.

In terms of installed base, we have long maintained that the Company has negative value generation. While SolarCity proponents have contested our view as speculative, it now appears that between Nevada and MyPower about 10% of SolarCity's assets are demonstrably and seriously impaired. We expect the impairment on remaining assets will start becoming increasingly visible over time. The next major negative news on this front is likely to become public when SolarCity announces the sale of its first tranche of assets. However, it is also likely that bad news will come to fore as early as this week as SunEdison attempts to wrap or terminate its Vivint deal.

Summary

SolarCity's MyPower loan product is officially dead. The loss of MyPower and the pervasiveness of loan products in the market means that an increasing portion of the company's 2016 MWs will come from lower price commercial assets. Consequently, SolarCity could see its first declining revenue year in 2016.

Between MyPower and Nevada holdings, about 10% of the assets that SolarCity now holds on its balance sheet are seriously impaired. The remaining assets will start becoming unquestionably impaired as market dynamics change and as capital markets start assigning increasingly higher discount rates to these assets over time.

We continue to maintain that the equity is worthless. Our view of SCTY -- sell short.

Disclosure: I am/we are long SUNE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.