Seeking Alpha

Oliver Davies

View as an RSS Feed
View Oliver Davies' Comments BY TICKER:
Latest  |  Highest rated
  • 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 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 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 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 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 05:03 AM | Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    Thank you, Don.
    Oct 19 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 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 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 06:33 AM | 6 Likes Like |Link to Comment
  • SolarCity: A Black Box Of Mystery [View article]
    So, in the future, with shale gas depressing utility rates, and natural gas at rock bottom prices due to prices set at levels that don't cover their sunk costs, do you think the most likely direction of utility rates is up or down?
    Oct 18 05:39 AM | Likes Like |Link to Comment
  • Astrotech Is Still Significantly Undervalued Despite Recent Move [View article]
    Thank you for the help.

    Also: correct me if I'm wrong, but did I read something about an increasing number of satellites needing to be replaced? This was a while ago and I can't remember the source. Have you read anything similar?
    Oct 16 02:08 PM | 1 Like Like |Link to Comment
  • Astrotech Is Still Significantly Undervalued Despite Recent Move [View article]
    What about competition from, for instance, Elon Musk's private space company? Do they overlap in any way?
    Oct 16 01:26 PM | Likes Like |Link to Comment
  • Astrotech Is Still Significantly Undervalued Despite Recent Move [View article]
    Interesting post!

    This is probably a newbie question but can you explain the language in the 10-K about returning all improvements on the land they've leased once the lease expires (at no cost)? Does that mean they don't really own the buildings? Or does it refer to only improvements to the land?
    Oct 16 01:21 PM | Likes Like |Link to Comment
  • Dark Clouds Ahead For SolarCity [View article]
    Perhaps I am being unclear. Are you aware that there are different supply demand models at different stages in the supply chain? Are you aware that the cost of a solar installation is not limited to the panel and inverter costs?
    Sep 23 12:38 PM | Likes Like |Link to Comment
  • Dark Clouds Ahead For SolarCity [View article]
    Why do you compare FSLR to SCTY? SolarCity is constrained by the number of people it has installing its systems, as well as their efficiency. As long as the US market isn't saturated (hint: many many years), the demand should outpace supply. In other words, there won't be a price war which will drive return on capital down. People in US seemed so used to dealing with saturated markets that they forget normal competitive forces don't apply here. There are plenty of rooftops to expand onto (and more every day as costs come down and electricity goes up).
    Sep 23 08:37 AM | 1 Like Like |Link to Comment