Isaac Silbermann

Long/short equity, long-term horizon, growth at reasonable price
Isaac Silbermann
Long/short equity, long-term horizon, growth at reasonable price
Contributor since: 2010
While I agree with a lot of the points in the article, Elon Musk is not the founder of SolarCity.
Musk's cousins Lyndon and Peter Rive founded the company and remain as CEO and CTO, respectively. Elon is the largest shareholder and Chairman of the company. The good news is that the Rives are brilliant and successful entrepreneurs in their own right.
Regards,
Isaac Silbermann
These midstream Chinese solar stocks are basically commodity producers and must continuously spend substantially on capacity adds just to keep revenue flat - a losing bet for shareholders n the long-run.
Adding such lousy corporate governance to the mix and an MBO that limits the upside is not a good sign. I am confused by your bullishness on this and other Chinese midstream names and simultaneous negativity on SCTY which has an unparalleled management team in the industry.
If you're really interested in Chinese solar, take a look at 0451.hk
Regards,
Isaac Silbermann
@Bizlike Investing
That is senior debt on the panels, so equity should require a higher yield if growth is assumed to be zero, which I am valuing the PowerCo at THEORETICALLY to arrive at a conservative value for SCTY's assets.
Additionally, I am leaving room for a rise in the 10-year treasury to 4% which is 190 bps higher than today. Assuming another 4% spread to 10-year treasuries I've arrived at the 8% figure which I think is a very conservative valuation for PowerCo.
Hi Rogier,
Always good to hear the bear side. I've got some counterpoints to some of your arguments:
1. Your assertion that the market ought to discount retained value to a 10% renewal rate is unrealistically low. If the technology and pricing are really so much better than just using the already installed 20+ year-old panels for a few more years, then the actual situation will probably evolve more along these lines:
A large amount of people will renew their contracts, some with new long-term contracts and new equipment, if the cost of equipment really has come down that much, it still makes even more sense to have distributed generation.
This is simply the incumbent effect. If SCTY doesn't provide terrible customer service and rates that are higher than utility electricity 20 years down the line, a lot of people would probably just stick with them.
Your assumptions that SCTY's base of customers is going to hate them after 20 years should be taken with a grain of salt. In reality, at least as of Q2 2015, existing customers referrals are a huge source of their actual customer signings.
Your conclusion about the very low renewal rate rests on your assumption that there will be a major decline in retail electricity rates from utility scale delivery. This should not be accepted as a given in light of the high cost of electricity delivery in losses and grid maintenance/expansion. These utility companies also have a lot of other capacity/costs they need to cover if there is further decommissioning of coal plants, old plants, etc.
2. If there enough people who don't renew or buyout the panels and want them removed, this will not be a major liability because the panel can be re-used or recycled at that point.
The raw materials of the panels & system will probably have a positive value, despite Bears' argument that they represents a large liability.
3. This issue around renewal won't even begin to play out for another 15-16 years and although does have implications to the ultimate NPV of the company, the situation on the ground is rapidly growing 20-year free cashflow of SolarCity's PowerCo today which will accelerate through Q3 2016.
PowerCo available cash is likely to reach an annualized rate of $350+million by the end of 2016 if SCTY can maintain its growth trajectory for a few more quarters. This is real cashflow that CAN be monetized in the market for a yield, it's just a question where that yield ends up being.
What kind of yields would the market demand then? Do you really think there won't be much demand for a 20-year US-based solar vehicle with diversified counterparties that is yielding 8%? An annual stream of cashflows of $350 million is worth $4.4 billion at 8% yield.
Their $123.5 million ABS, as announced, has a blended cost of 4.41% so a 2.18% spread to treasuries 1 day prior to the date it was announced. As far as cost of capital, that is quite a bit lower than 8%.
4. Speaking of that ABS, do you have specific information that the syndication of the ABS is being "called into question", per the first summary bullet of this article, by the people that are actually carrying it out? Or by this do you mean it's being called into question by yourself in this article?
Regards,
Isaac Silbermann
I am not too concerned with this recent pullback, the market seemed to like/accept that SCTY's Q2 was strong. I actually bought some shares yesterday in the low 50s.
Though no one can say for sure, it seems that SCTY is now falling because the sector is in a downtrend following SUNE's Q2 which clearly the market did not like, since that stock is down about 35% since the release, on top of its recent declines.
A second potential reason which occurred around that time is just from the macro picture with Atlanta Fed president Lockhart seeming to confirm a September timeframe for a rate rise, the market seemed to be expecting the fed to hold off based on some soft data points in the Q2, but Lockhart seemed to dismiss that last week.
Fundamentally, if interest rates rise too much, too fast, it will hurt everyone in the solare sector, SCTY included. I definitely can acknowledge that. Maybe YieldCo valuations demand 7-8% yield a couple years in the future vs. <5% today, in which case, SCTY's current rooftop portfolio might only be worth $2.0-2.3B vs. $3B+.
On the flip side, I think that a lot of sectors in the economy would be hurt by quickly rising rates and that there are some fundamental deflationary pressures in the global economy, US included, which will keep inflation tame. So I think we will probably see a period of slowly rising rates for several years.
I am encouraged by the pricing of SCTY's most recent ABS which indicates that abundant, long-term and quite cheap debt financing is still most definitely available for the assets created by SCTY.
Day-to-day gyrations can be caused by many factors, we should re-examine our respective positions and results over a longer time-frame.
Specifically, vertical integration into high-efficiency panel manufacturing is what makes the most sense for rooftop solar players. Beyond capturing the value-add on the modules & logistical cost savings, this will have a big impact on balance of system costs and/or potentially larger overall system sizings, especially once they start selling the Powerwall.
SolarCity remains a few steps ahead of the game, which is why I bought in as a shareholder. The potential future risk that I see is a theoretical delay in the roll-out of the manufacturing, like happening at TSLA right now. That could cause short-term volatility, but once it's actually deployed. vertical integration of high-efficiency panels will strengthen SCTY's already strong long-term competitive advantage.
Except if the development doesn't actually damage the business model. We'll have to wait and see if this actually ends up reflecting negatively in SCTY's numbers or if it is basically a tempest in a teapot. So far SCTY's lease growth in absolute MW terms has accelerated since your initial bearish piece. So not only is it taking a while, but the trend is actually going in the other direction.
Leasing is a proven model across a lot of industries, and it seems to have taken hold in solar given recent figures suggesting over 70% of people choose to lease. In terms of your arguments regarding falling costs being less of an incentive to lease, that may or may not be true, time will tell, however there are some counterpoints as well.
As SCTY starts to offer TSLA's powerwall products bundled with the solar systems, this will raise the ticket price and make leasing relatively more attractive. You may counter that the powerwall probably won't be very popular, but the overwhelming response in the market suggests that it will be.
Your bearish call on SCTY's business development is not playing out in reality and neither is logic of the argumentation behind it. What matters is SCTY's growth in NPV, and this will accelerate into 2016.
Based on ITC expiration, I do expect to see some slowdown in 2017, before the cost curve kicks in and you see better growth in 2018 and 2019. It is also possible that the ITC is renewed and then SCTY is going to rise like a cork under pressure.
We can revisit this in a few quarters. I'm pretty sure that you will keep hating the business model, hopefully you can also honestly reflect on the results as they play out.
I do appreciate the bearish views, one has to understand the bear case before making an investment. So, I look forward to continuing to read your pieces.
Casual Analyst,
You've basically been predicting the eventual demise of the Solar Leasing/Financing model since your article on April 9, 2014 - (http://bit.ly/1tADgXw).
Looking back at Q1 2014's results, they deployed 82MW, had 136MW of bookings and had a cumulative deployment figure of 649MW, and ~106k of cumulative energy contracts (i.e. customers who decided to lease).
As of Q2 2015, deployed 177MW (Installed 189 MW), booked 395MW SCTY and had 1325MW of energy contracts representing ~252K cumulative energy contracts.
Since your original bearish thesis on the company SCTY's ability to secure and deploy leases has expanded substantially:
Ability to deploy has gone up 116%;
Ability to book customers up 190%;
Cumulative energy contracts up over 100% on any metric;
About ~146K additional leasing customers (137% growth).
On April 8th 2014, the day before your article was published, SCTY closed at $55.90. It now is just a hair over $60, approximately 16 months later. Anyone who was short at the price of the original article, they’re only down about 7.5% in price terms. But in terms of the value contained within SCTY, the position is really starting to move against them as SCTY continues to grow at an impressive pace and compound on their early success.
I’m going to use a rather dramatic analogy here but I think it is appropriate: SCTY has the potential to morph into a multi-headed hydra for shorts. That’s because their actual growth represented by customers and cashflow from assets/value is expanding on an exponential basis vs. when a lot of these folks opened up positions.
SolarCity's fundamental business value is already up over 100% by pretty much any metric since your original bear-piece. This growth is already being constrained by negative policy momentum, ITC step down is priced in, there’s lots on the policy side that COULD go right for longs; while the bear case of monopolistic obstructionism and lack of appeal of leases vs. purchasing is taking longer to play out.
Meanwhile the Company is compounding on its early success and able to maintain 75+% growth across most value creation metrics now on much larger base. SCTY’s compounding growth has the potential to get really ugly for shorts.
Your thesis that people will not lease solar is wrong, the numbers speak for themselves, it’s time to move on from this incorrect position.
Regards,
Isaac Silbermann
Hi Bill,
The accounting here is unreflective of the actual value SolarCity produces in a given quarter. GAAP rules regarding the recognition of revenue and profits in a single quarter leads to this metric drastically undervaluing the asset creation value to equity of long-life power production assets.
One should to compare the value the company creates in a quarter with the loss in a quarter. In Q2, there was a lot of value created: ~190 MW installations + ~400MW bookings. These are long-life power assets with unlevered IRRs around 12%. Unless you think 10-year treasury is going to 6+% in the next 18 months, that is a very attractive return.
If you compare the NPV of the assets created with the quarterly losses, SolarCity look great. At minimum, the actual value of the assets created in the quarter is the value at which it could be spun out into a YieldCo. We've seen that is north of $1.50/W in precedent transactions. Current GAAP accounting instead has SCTY only booking the revenue from a new solar asset as the first quarter of an 80 quarter asset. This accounting is unreflective of the actual value to equity created by that asset, since you could spin it out/sell it in Q2 and book a much higher gain on sale.
On the surface GAAP accounting will continue to drive the bear case against SCTY, but it is fundamentally losing line of argumentation. As long as they are able to finance their expansion through minimal equity dilution, then the case as a long is pretty clear here.
Shorts that understand this industry are going to be scared after Q2. Shorts that are short because of the GAAP losses are just going to have their positions move hard against them in the next couple of quarters, and they will have to cover to save their own returns.
Regards,
Isaac Silbermann
"Managing a moderately skilled labor force on a national/international scale is a losing proposition."
Can you please explain why you think this? In terms of the positives, some of which i mentioned, they can establish training centres, give standardized training, learn from the experiences of the best crews and incorporate this into training of crews nationwide, work out winning incentive systems and provide greater stability in work to their crews to keep them working. Beyond simply saying it, please explain why this is "a losing proposition".
"As for vertical integration with manufacturing, the SCTY management appears to have backed away from that already. Why no mention in the prepared remarks or presentation? They had to be asked."
This is some pretty serious conjecture on your part simply on the basis of not initially mentioning it in one conference call over a year before it's supposed to be online. Based on reading the local Buffalo media, things seem to be moving full steam ahead. Here's one very recent example:
http://bit.ly/1IcSGXG

And based on answering questions in the call they also mentioned that it is on schedule to reach full production capacity by the beginning of 2017. I don't think there is much doubt, that they are going to be a major panel producer. You might question the timetable, although the indications from all news sources vs. your conjecture is that it is progressing well...
This is a good point, but I think it is highly unlikely that interest rates will begin to "rise rapidly". I'd suggest that rates will rise, but slowly. The economy and the stock market in general just cannot handle a large rise in rates without killing growth.
Q2 GDP was weaker than expected:
http://bit.ly/JER9ci
Core inflation is still below 2%:
http://bit.ly/1NH2dIt
Wage growth in Q2 was the slowest since 1982:
http://bloom.bg/1IePGI7
Unless Yellen wants to kill the recovery and send the US into deflation, rates aren't going to rise by more than 1% in the next 18 months. So yeah, this does have an effect on NPVs and the yield the market might demand. Maybe the YieldCo would have to yield 6% instead of 5%. Still gives a valuation for PowerCo based on $160M annual CAFD as of today of $2.67B.
I think your statement about a 30-year bull cycle on interest rates is misplaced as well. Because of the inherently deflationary pressures unleashed by aging demographics in the West + deleveraging cycle globally, I think it's pretty clear the next 20-years is going to be deflation-biased. We are more likely to have 20 years with low, but non-zero interest rates. Global economy is weak and US doesn't exist in a bubble. Raise rates too much the dollar gets too strong, US companies get killed globally and you also damage the US recovery and domestic consumption.
So yeah, interest rates probably going to move up a bit, but I think it will be a lot less and a lot slower than you think. That said, if you really do think US interest rates are going to move up a lot in the next 3 years, it's pretty easy to do the sensitivities on PowerCo's value. If PowerCo had to yield 10%, then it would only be worth about $1.6B as of today and maybe $3-4B as of year end 2016.
I would strongly disagree that a national installer is not valuable. It clearly is something that is scalable which you can see in SCTY's industry leading installation cost/W. The bigger you are, the more panels you install, the more teams you have, bad teams get eliminated or get better, good teams share their tricks, company training for installers improves their prospects.
I think the vertical integration into manufacturing is great. Fantastic way to expand the value chain and lower costs. Chinese manufacturers like YGE, TSL, etc. all face pressure to expand their capacity but need to find people to sell their panels to, so the price goes down and they are continuously facing this problem. SCTY already has a sourced demand, so this should be very positive for the company.
Bizlike Investing,
I have been using this picture since my first article written on this website which was over 5 years ago. It looks like you've been writing since last year, so it seems like you took my picture. Anyway I'm going to keep my picture, hopefully people won't get too confused.
Soylent Green is made of people....
Interesting article Kevin, wonder how easy it will to get beyond the initial yuck factor. It's one thing for almond milk to corner the alternative milks market, it comes from something many people already like eating. Algae milk is something else entirely. They'll need a slick marketing campaign for something like this to catch on.
Robert, it is an absurd hypothesis that SSH could ever have a market capitalization of $100B off this single device. That would make it largest dedicated medical device company in the world, larger that Boston Scientific, St. Jude and Medtronic combined.
Hyperbole like this smacks of stock promotion, which is unfortunate and a little disheartening to see in this case because SSH does seem to have some good potential to be a $1 billion company. That kind of return from current levels should be enough for anyone.
SSH is dealing with late stage HF patients, not just HF patients, you should look at the penetration rates of that particular subsegment to project out SSH's actual potential. SSH is well financed, an experienced team and what seems to be a solid device. I like the direction of their R&D as well, never standing still is the mark of a good company.
I shorted this stock at over $4 and covered for less than $1.50. Not sure what planet you are from but here on Earth that is called calling it right... FYI, I am no longer short, covered in September 2013.
You're kidding right? Did you read the article? The shell shares should be free-trading, representing millions of dollars worth of shares which were basically printed.
Furthermore, are you really so naive to think that there is no way to distribute restricted stock? If yes, I suggest you read this: http://bit.ly/XwnxUc
Then do a google search for "illegal sale of restricted stock" or "unlawful sale of restricted stock".
Devon, I like reading your work on Canadian oil industry names and own PBN long.
This is an interesting article about an enigma of a company. Despite the ownership from some big fish, Pershing is an RTO, it has a lot of low cost shares out over the years and I have seen it promoted on paid tout sheets advertised through Yahoo Finance. This is usually enough to get me to short the company, but because of the things you meantioned I've never decided to commit to PGLC as a short.
That said, I'd suggest doing a lot more homework into things like past corporate transactions, players in the RTO, etc. before you do anything more than dip your toe in this one.
Some people actually own this stock. Firstly I would like to warn them about it; I don't like to see students and retirees losing money while stock promoters and crooks get rich. Without exposure, scams fleece more people for more money over a longer period of time.
As far as the borrow goes it is also not impossible to get borrow on it and should become easier over time. Such is the nature of pump and dumps, as more volume gets pushed out then the borrow will loosen up on its own as more suckers hold the overvalued paper.
Every single APS pick is a fundamental zero but they are smart with how they set up their pumps and have lots of past profits to wash-trade the stocks with.
My understanding is that those 13 million are reserved for issuance under the stock-based compensation plan, but the majority would not have yet been issued.
Good article Ben. I love the haters comments against your work, totally classic. Well the stock is down over 33% today, so maybe 2 guys aren't worth it!
Look forward to your future articles. IMSC is a total gimme for shorts as well! :)
You are right, no one will purchase Parkervision. This is because its patents are worthless. PRKR is just a nice little vehicle for Jeff Parker and management to extract tens of millions in compensation while spinning a nice little pie-in-the-sky story for investors. One of the biggest scams in the market today.
Neil, I have accounted for that $8-9 that you refer to as the "Final Distribution", it is in the valuation model and the article speaks at length about this in the article under the heading "Misconception #2: Shareholders Will Receive Anything Beyond the Final Distribution for the Trust's Current Royalty or Land Rights".
Fantastic article as usual Geoteam.
Very nice article Rick, particularly in terms of your expose of management's corrupt self-dealing with shareholder cash. Definitely some very dicey transactions going on here that should cause shareholders to squirm.
Results reported today significantly better than your projections. Sales of Fluticazone were down only ~6.5% and on a QoQ basis the company seems to be holding its ground with revenue increasing about 10%. Although margins are deteriorating YoY, the EPS came in at $0.66 vs. your projection of ~$0.30-0.35. I'm interested to hear your take on all of this because fundamentally the short thesis still seems quite interesting...
Nice Article Infitialis. Yes, this stock is in a huge bubble. I am also short.
I do think that consumers that are concerned with organic would probably look beyond the standard nutritional information and be more concerned with things like antibiotics in their cheese, etc. That said, something is disclosed as a risk in Annie's IPO prospectus is that they use bisphenol-A in their packaging! Hardly becoming of a company with this kind of positioning...
Yes. This company is a disaster. A Wall Street endorsed pump and dump designed to bilk ordinary investors while enriching ANGI's CEO, management, VC investors and the investment banks underwriting financing deals.
This stock is $5 or less in 12 months. If you haven't seen it yet, check out the DD that I have done on it so far here:
http://seekingalpha.co...
http://seekingalpha.co...
http://seekingalpha.co...
I think the results were bad, the company lost $18 million and burned $11 million in cash. But the results were not as bad as what people, including myself had expected. Since the stock was trading very near the 52-week low, it rebounded.
The earnings release detailed how ANGI is going to buy real estate from a company 70% owned by the CEO for $6.25M. While the company has lost over 60M in the past 12 months, the CEO has taken home over $10M. Nice gig.
The company has still not disclosed the lawsuit to shareholders, which is clearly a material event. It also strikes me that if they settle or lose the lawsuit, they could face an SEC investigation at some point because they were illegally inflating their revenues so that the management and directors could sell hundreds of millions of stock. The company also seems to have a number of undisclosed real estate development related commitments, beyond buying the property from the CEO's other company which could eat into their liquidity going forward.
Historically, it just hasn't been the case that the company has ever developed significant operating leverage, certainly not enough to ever make up for the ever increasing amount of overhead spending.
I doubt the 80% contribution figures cited by management on advertising renewals, this smacks of more smoke and mirrors accounting to me. That figure suggests that very little of the ballooning marketing expense should be allocated towards these renewals, but it probably should be. The company would lose 22-25% of its subscriber base in a given year if it didn't spend a ton on marketing. I don't think renewal of service provider revenue would come in too favorably under this scenario...
Overall, I think that management is clearly in the twlight zone here, if they believe that their 9 month $55.3 million loss represents a "very good year". Lenin said that "A lie told often enough becomes truth", except that in reality it doesn't. The truth is that the company has never made a profit, it's losses continue to widen and it will be forced to return to the market in a couple quarters for financing.
Historically, it just hasn't been the case that the company has ever developed significant operating leverage in this respect, certainly not enough to ever make up for the ever increasing amount of overhead spending.
I doubt the 80% contribution figures, this smacks of more smoke and mirrors accounting to me. That figure suggests that very little of the ballooning marketing expense should be allocated towards these renewals, but it probably should be. The company would lose 22-25% of its subscriber base in a given year if it didn't spend a ton on marketing. I don't think renewal of service provider revenue would come in too favorably under this scenario...
This actually wasn't what was said. He said that they would be unlikely to let their total liquidity drop below $60M, i.e. if they burn another $20 million they will need to seek additional financing.
Regarding the change in comp, firstly, this will not save them $10M and they are not saying it will. Management is claiming that once the shift is fully complete it will reduce their working capital requirement by $10M through timing payouts to when revenue is received, vs. prepayments. This would be a positive change. That said, they admit that the company will see "higher selling expense as a percent of revenue in the near-term" and that this will be a very gradual transition. They are additionally guiding for an increase of at least $2 million in selling expenses for the 4th quarter. So I don't think this really changes much.
The management is clearly in the twlight zone here, if they believe that their 9 month $55.3 million loss represents a "very good year". Lenin said that "A lie told often enough becomes truth", except that in reality it doesn't. The truth is that the company has never made a profit, it's losses continue to widen and it will be forced to return to the market in a couple quarters for financing.