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Oliver Davies

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  • Will $0 Down Loan Programs Cripple SolarCity's Lease Model? [View article]
    I'm finding it difficult to follow the logic behind your method. If someone sells their system after 10 years and buys a new one, wouldn't they end up paying almost twice as much as they did for a leased system which they keep for 20 years? Surely the fairest comparison is to assume both the loan and the lease keep the system for 20 years?

    If you did that, the total payment difference (using your assumptions) would be far smaller. (At the very least you should look at the total costs and benefits to a consumer who buys a new system after 10 years.)

    Also-- what about maintenance costs and inverter replacement? In my model I calculate those two expenses at $3,425 over a 20 year period. I guess by selling the system after 10 years you apparently "avoid" the inverter replacement cost. But then you're just passing it onto someone else.

    You (and all the loan advocates) are also creating a straw man by saying SolarCity keeps the tax credits. It's a marketing gimmick. What matters is the total cost to the consumer. SolarCity accounts for the fact it keeps the tax credits when setting prices. By doing everything for you (including maintenance etc.), they ensure the process is frictionless.
    Aug 5, 2014. 06:38 AM | 7 Likes Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    RSA. Sorry for the delayed reply.

    While valuation always comes with a wide margin of error, I believe it is important for investors to develop a retained value model so they can understand how changes in different inputs changes value.

    For instance, if installation cost is only $1/Watt yet SCTY is charging 15 cents per kWh, then retained value is significantly higher than if installation cost is $3/Watt.

    What if retained value is actually higher than SolarCity is saying? Not one bear has considered that. They just start from $1.9/Watt and say "here's why it should be lower than that." These bears do a good job of pointing out risks, but not a good job of making an investment thesis. There's a wide difference between the two. And no, I don't think CA has bridged that gap.

    ITC-- yes it drops to 10% in 2017 but right now you can't model retained value without understanding the mechanics of a tax equity structure. That's all I'm saying.
    May 19, 2014. 12:11 PM | 1 Like Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    TheBanker I totally agree. Electricity is electricity is electricity.

    Black and White picture is not Color picture is not A Color Wide Screen picture.

    How hard is the difference to understand?

    But we should still think about this removal risk. RSA's argument that people will simply want solar panels that can generate more electricity per area makes more sense.

    So what happens if a SCTY customer wants a new system after 20 years? In this case you'd expect SolarCity to lease the new system at a discount to market price, since they already have the relationship. SCTY would have to eat the removal cost, but removing the panels and installing new ones simultaneously will make this cost much smaller, as the men will already be there (How much extra time will they need to do this? Will they use new racking?). When you also consider the fact SolarCity saves money elsewhere for this new lease (it already has the relationship; it already has a design plan; the customer already has training) and will get some sort of value for the old panels (whether scrap or otherwise) then I think the most bearish case you could reasonably make is that SolarCity makes $0 on leases after year 20.

    And so I still can't understand how someone can worry so much about a 30% drop in retained value when they also believe solar costs per Watt will be 70% lower in 20 years. Investors should consider the volume part of the profit equation.
    May 19, 2014. 11:51 AM | 1 Like Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]

    Sorry yes my fingers erred. If I was using $15/kWh retained value would be many times higher!

    I really don't agree with the idea that there will be unbooked liabilities. I think assuming they will sell the electricity at market price is fair enough. Regardless, I wonder whether SolarCity should look into contracts which say we'll renew at market price or, if not, the homeowner must pay to take down the panels. Alternatively, the panels can just stay on the roof and SolarCity sell the electricity to the grid. If I was management I'd look into options like that. SolarCity could end up with hundreds of thousands of mini peaker plants.

    My general argument is just that

    a) assuming a 30% renewal rate doesn't make SCTY expensive.

    b) If installation costs are truly as low as resident industry experts say (making purchase systems so attractive relative to leases), then retained value is actually significantly higher than SolarCity is stating (using SolarCity assumptions for the other inputs). The lower the installation cost, the higher the spread SolarCity makes on its leases. But to work that out you need to have a model that calculates retained value (including the tax equity component). I think if more people on these threads used this method they would have a more credible investment thesis (and might even question their case). After all, what is an investment case without a valuation? Unfortunately the bears on this site just take SolarCity's number as a starting point, and then point out flawed assumptions and how the number should be much lower. A solid investment case would involve building the retained value model from the ground up and inputting your own assumptions.
    May 16, 2014. 01:54 AM | 3 Likes Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    Yes, sorry. I feared my use of "DIY" would invite an attack. I understand people don't literally have to install it themselves. I just meant SolarCity gives a peace of mind these other methods don't.

    The other point naysayers are missing is that, if installation costs are truly now below $2/kW, then SolarCity is massively sandbagging on the retained value of its residential systems.

    At a $15/kWh PPA, a 2.5% annual step (with 0.5% annual panel degradation), and staying with SCTY's assumption of 90% renewal rate, I calculate a retained value per Watt (before tax) of $3.05 when the cost per kW is $2. (Yes, I'm using a 6% discount rate.)

    Using the perhaps more realistic 1% step, and inputting CA's assumption of a 70% renewal drop off into the equation, and the retained value value (before tax) falls to $2.16.

    Cut the PPA to $10/kWh and the retained value (before tax) drops to $1.10. That's keeping the 1% step and 70% renewal drop off.

    Given what these lower prices would mean for volumes, I really don't understand how someone can be so unconditionally bearish at this price, even if they do think the renewal calculation SCTY gives is bunk. SolarCity will keep selling at these prices until it has to cut prices. And when it does, it will still make a bucket load of money.

    If SolarCity keeps up the (apparently actual) $3 per Watt retained value for only 2 more years, it will add roughly 1,600 MW * $3 = $4.8 billion of incremental retained value. Add that to the $1.2 billion of retained value today, and your retained value after 2 years is $6 billion. Let's say $4 billion after tax. That means shareholders are only paying roughly $1 billion now (market cap minus $4 billion) for whatever happens after two years in a market that will still be heavily underpenetrated. Given SolarCity will be installing at least 1MW, and probably 2MW the year after, that seems very cheap indeed, even with a retained value (after tax) of 70 cents (0.7 * 2MW = $1.4 billion in incremental retained value). And at these slimmer margins, scale will matter even more. So to me it seems insane to short, even knowing everything the industry experts are saying. Do you really want to bet SolarCity won't keep this racket going for 2 more years?

    PS While it's somewhat of an aside, my personal macro view is that interest rates have only one way to go: down. This outcome would also boost retained value higher.

    PPS Also, for that poster who keeps saying scale doesn't matter. Yes, I believe scale does matter. SolarCity can put more dollars into marketing and R&D, and buy raw materials in bulk. It can also leverage distribution centres. Finally, it can provide a better quality service, which is very important when consumer facing.
    May 15, 2014. 09:31 AM | 1 Like Like |Link to Comment
  • SolarCity Leases And PPAs: Counting On Uninformed Customers And Investors? [View article]
    Nice article, but here's why I disagree:

    1) Let's assume you are right about the renewal rate and low solar costs mean SolarCity can only charge a 30% of what it does today. What does that mean for future demand for distributed solar? How does demand for solar change if it becomes so much cheaper than every other current offering out there (fossil fuel prices rise over time)? I think it's fair to assume storage will make sense by this time, so you're looking at every house in America (barring those with an issue with the look/shadow on roof etc.) getting solar. Think of all that volume.

    So let me paraphrase your argument: Solar is going to cover every roof in America, but because retained value is roughly 23% lower than SolarCity is saying (33% * 60%), don't buy SolarCity. I personally think that logic is flawed. In this scenario, I believe you want to own the scale player, which SolarCity is rapidly becoming.

    2) Customers being duped-- doing it yourself is cheaper. This one always strikes me as funny. You could make the same case about any project which you manage yourself. SolarCity makes things easier, and it charges for it. It's been a while since an analyst I met prophesized the end of auto repair shops ("you know how much cheaper and easier it is to do it yourself?"), and it still hasn't happened. Maybe the premium needs to come in, but that doesn't make SolarCity a bad investment.

    3) Customers being duped with fixed prices or escalators. Does Apple dupe its customers each time it sells them an Ipad knowing they'll release a new one in 2 years? Or that the customer will be able to buy that very same Ipad 2 years later for a lower price?

    4) Discount rate. This isn't in the article, but maybe you'll come back with the argument that the discount rate on retained value is too high. I find it hard to believe how people can be so confused about this point. The discount rate is low for cash flows that are already contracted and have lower defaults than mortgages. They are low risk. If the company only owned these cash flows you can bet the P/E multiple would be very high to reflect their safety.

    What IS much more uncertain is how many future operating leases SolarCity is going to sign. Is SolarCity really going to install 2000 MWs in 2016? Who knows? If it does, the retained value will be calculated with a 6% discount rate (I'd make the case for lower). HOWEVER, when calculating the value of those future installations to shareholders today, I would use a much higher discount rate to the present. Say 15%. That's where the high operating risk must be accounted for. Not in the already contracted operating leases.
    May 14, 2014. 07:21 AM | 11 Likes Like |Link to Comment
  • Dex Media: Time Is Running Out For The Yellow Submarine [View article]
    Nice article.

    But you haven't disproven the thesis in the previous article that this slow down in digital is due to merger integration problems. At least the other guy had/pretended to have calls with "industry insiders". It is well known that the digital revenue looks bad and the company is highly leveraged-- that's why the stock is down so much. If, for whatever reason, new data shows this merger integration thesis to be only partly true, then this stock goes flying.

    And it's a little bit disingenuous to look to debt prices. Do you believe the market can be mispriced or not? If not, then why are you short?

    Despite all this, I'm sure this stock is about to fall 40%.
    Nov 26, 2013. 09:57 AM | Likes Like |Link to Comment
  • The Problemas We Found In MercadoLibre's Earnings [View article]

    You are now confusing relative prices with absolute prices. Inflation is the rise in all prices. What you're describing in 2008 ("and other crises") is nothing to do with inflation. Yes, if property was overvalued already then maybe it won't be such a great inflation hedge (depends on how high inflation is). But if property prices were overvalued by 20%, and inflation is running at 40% per year, it's a pretty good bet to buy property.

    Agree that initial effect is rentiers benefit, but as nominal incomes and prices rise, so will nominal rents (and most importantly, so will nominal property prices). So while you lose out partially on the income from the asset, you will gain fully on the property prices. It is this gain in property price that will offset the currency devaluation.
    Nov 15, 2013. 08:13 AM | Likes Like |Link to Comment
  • The Problemas We Found In MercadoLibre's Earnings [View article]
    Sorry if I'm not being clear. Currency devalues precisely because of inflation, otherwise the weak currency would mean foreigners could buy Venezuelan goods and services on the cheap. In fact, if the currency was "unfairly" devalued (i.e. not a result of inflation), then it is unreasonable to ask the company to use the black market exchange rate, as you are asking them to do-- the exchange rate wouldn't reflect the real purchasing power of the Bolivar. You can't make both arguments at the same time.

    Are you saying lease contracts aren't inflation protected? Are you saying property prices don't rise with inflation?

    You're disconnecting currency devaluation from inflation. They're intimately connected. As the currency devalues due to rapid inflation, property prices rise (and rents eventually follow) as the currency depreciates. This is why property is an excellent hedge against inflation, and the depreciation in currency that accompanies it.

    Don't take this as me shooting down your article. I liked your thesis, just don't think your property hedge analysis is correct.
    Nov 14, 2013. 08:13 AM | Likes Like |Link to Comment
  • The Problemas We Found In MercadoLibre's Earnings [View article]
    Well written report but I feel you lose credibility with your real estate rant. Generally a currency devalues in the manner described because of inflation, so yes, buying real estate is a good hedge because rents and property prices will rise. If currency is devaluing due to huge intervention and inflation for some reason doesn't result, the currency will need to snap back.

    I'm not even in this name but very interesting article.
    Nov 13, 2013. 02:10 AM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    Maybe it's the other way round... and price will fall because of competition.

    But, as I've said, price is unlikely to suffer much in a quickly growing industry as there is no need to compete on price to win business.

    And there's enough volume for everyone.

    To my point about elasticity. These businesses cannot ramp up to serve higher volume instantly. So, if there is significant price competition, there will be an offsetting increase in demand which will pressure capacity and reduce price pressure.

    But even if there is price pressure, it needs to be considered against the operating expenses SolarCity pays for each lease.

    There will be a point where all these companies have expanded capacity far too much to service demand, but it is not today.
    Oct 19, 2013. 05:03 AM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    Thank you, Don.
    Oct 19, 2013. 04:53 AM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    Also don't forget that we are in the elastic portion of the Solar demand curve. If prices fall dramatically due to competition as you say they will, demand will rise as solar electricity prices distance themselves from utility rates.

    It will also be interesting to see how they leverage opex going forward.
    Oct 18, 2013. 07:52 PM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    1) First of all, gross margins in operating leases have hardly fallen. This is 90% of their installations.

    2) Second of all, even if they have fallen, that doesn't mean it's due to competitive pressure (mix, geography etc). And anyway, it's a mistake to focus just on gross margins as you have to consider all the financing.

    3) Third of all, I am not sure exactly what you're saying. But my point was that if the cost of electricity from new leased solar panels in 20 years has dropped sufficiently that people have incentive to switch, then Solar will have truly made it and the future is bright whichever way you cut it.

    4) By drop in price I meant that SolarCity assumes they renew the panels at a lower rate.

    5) I understand discount rates just fine thank you. If you want to think their already contracted operating lease cash flows deserve more than a 6% discount rate than fine, but I'll stick to 6%.

    6) No I'm not sure I'm able to Google the positive effect the two acquisitions have on SolarCity's intrinsic value and competitive positioning.

    7) I think it is abundantly clear all my questions were NOT answered in your article, and if you're being honest with yourself, you will admit that.

    8) I think you will come to regret your final paragraph. What matters is how many dollars SolarCity puts in for each dollar of retained value (net of tax). You haven't addressed that once and are telling me to look in the 10-K for answers. I'm not sure that makes sense.

    9) By the way I calculate that they need to reduce total system costs by 27% in order to maintain the same level of profitability when incentives reduce in 2017.

    10) Having read your article again, I believe that your comment about "not raising the discount rate because they would need to impair their fair value calculations" is wrong. When calculating the "fair value" of the system for calculation of depreciation and ITC credits, they are looking at the unencumbered lease and applying a cap rate. When calculating retained value they are only looking at cash flows SolarCity will receive. I'm pretty sure these are different things.

    11) As a final note, I'm not sure why you think $21 billion in capital is impossible to raise. There is plenty of savings slushing around the economy. All that matters is they can provide the capital with an appropriate return (imagine if a securitization market kicks off). But let's be honest... they don't need to get anywhere near their target to justify the current valuation. Perhaps more of greater concern is whether there is sufficient solar supply to do this.

    12) Having said all that, I'm worried that the valuation is going to rush ahead too quickly.
    Oct 18, 2013. 07:35 PM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    1) Lack of competitive moat

    First of all, for an industry with the whole of America to eventually expand into, and one that is racing to build capacity to service demand (note: I'm not talking about the manufacturers), why do you think competition will hurt? So what if DIY solar or bank loans or other offerings take a bit of market share?

    Second, where is your argument that they don't have a competitive advantage? You've shown a chart that shows other companies come close to offering a similar service. Even if they all offered the same vertically integrated service, that is not an argument that they don't have a competitive advantage.

    I wonder whether the fact they've started far in front will carry them far. Apparently 60% of all new business is referrals. The bigger you are, the more referrals you get.

    I don't think you can discount the financing advantages afforded by their own collection of data. Nor their technology offerings (they are bundling their software). Then, like another poster said, they're going to be at the front of the curve when it comes to storage. Admittedly that's a number of years away, but if you're a long-term investor as opposed to someone looking for a quick short sale profit, that's the kind of thing you care about.

    Brand is also important with consumers. How famous is Elon Musk? These intangible things matter.

    Then you have their recent acquisitions which strengthen their offering.

    And then there's their ever increasing scale.

    That being said, I don't think competition should be a worry at this point.

    2) Retained Value

    20 year renewal

    What about the fact they assume a drop in price?

    And what about the fact it costs money to come and remove solar panels and replace them with new ones. The panel and inverter costs are only about $1 per Watt in cost. Unless you believe sending 2 men in a van is also going to drop precipitously in cost, then you should re-think your argument.

    And what about the fact, if Solar Installation becomes as cheap as you believe, that SolarCity will be a gigantic business and that the leases they've installed now will be irrelevant. Put another way, you're saying "solar in the future is guaranteed plentiful energy for all, don't buy SolarCity".

    Discount Rate

    You're missing the fact tax equity financing is only needed for the first 5 years. The investors get an 8% or whatever return on their investment and then are out. If SolarCity financed the other third of the installation with equity, then it owns them completely. If it used an aggregation facility (recent ones at 4%), then it owns about 2/3rds of it. In the future, it will hopefully also use securitization of its more mature (post tax equity) leases to raise capital to fund the non-tax equity part of new installations (or, when these incentives dry up, maybe the whole of it).

    Anyway, what matters when you're taking an NPV of the cash flows to Solarcity after all financing is considered is one question and one question only:

    How safe do you think those lease cash flows are? Very safe. That's why a 6% discount rate is sensible. They're stable cash flows.

    3) Dilutive Equity

    Can you please give a proper analysis of how this dilutive equity hurts valuation. Considering the positive valuation effects compared to the negative dilution effects?

    4) Reduction in Incentives

    Again, how does this affect the cost that SolarCity can offer to shareholders? How much cost do SolarCity need to take out in 3 years to offset the decline It's pretty lazy just to say they are expiring. Hint: it's not a stretch to believe they won't have to raise prices. If anything, if they run themselves more efficiently than the other companies, they will have a clearer cost advantage. Tax incentives hide inefficiency. When they're gone, the companies who worked out how to do it at the least cost will win. My money is on SolarCity's management.

    5) Rise in interest rates

    This needs to be considered against the fall in spreads as investors become more confident in the stability of solar lease cash flows.

    6) Valuation

    Using metrics like price to sales is a pretty lazy analysis. Especially when comparing them with different companies.

    What do you think the true retained value of each leases is? (by the way, using 6% discount rate, you can work out the retained value of new residential leases as anywhere from $1.8 to $2.7 per Watt). How quickly do you think they'll install them? How long will they manage to keep installing leases at the retained value you believe exists? If retained value falls, are their installation/marketing costs etc also falling due to scale and efficiency improvements, meaning return on capital is staying as high? These are all questions that matter and would be far more convincing than what you've posted.


    Almost certainly, SolarCity must cool down in the short-term. But I can't see how you can be comfortable with a short based on your analysis.
    Oct 18, 2013. 06:33 AM | 6 Likes Like |Link to Comment