Next week, we will share a detailed report on SolarCity. To be clear, we love Elon Musk and find Tesla (NASDAQ:TSLA) a fascinating company. However, SCTY is NOT Tesla, and while Elon Musk's cousins do run SCTY (this relationship is rarely disclosed), Elon does NOT run SCTY. While the business of residential solar installs is hyper-competitive, we believe that investors/traders are completely ignoring fundamentals - our report may change that.
In our report, we will meticulously detail the seemingly arbitrary assumptions management has made to calculate the NPV (retained value). Additionally, we will show why we believe management quietly changed a key assumption from the IPO that effectively inflates NPV (disclosing material changes in fine print without reference to those changes is not appropriate disclosure). We will also discuss the sensitivity to changes in rates and the implied installation growth SCTY must achieve to ever justify the current valuation.
Further, we will highlight discrepancies between SCTY financial press releases and their SEC filings. We will also show how a bulk of their retained value is contingent on aggressive assumptions around pricing (assuming they can raise prices on customers almost every year by nearly 3% for 29 years), as well as a 6% discount rate that seems completely disconnected from their internal cost of capital and what a similar yield asset would command. This discount rate has not been adjusted by management despite a nearly 18 BP rise in the 10-year yield since they came public.
We will also discuss the reliance on tax equity and the lawsuit the Treasury has filed accusing SCTY of overstating the FMV of their solar systems to obtain higher tax credits than fair market value would warrant. Other topics will be included such as the implied ROIC on Q1'13 solar system capex of NEGATIVE 18% and the decision to stop disclosing metrics that are unfavorable...
Again, Elon Musk is an American success story, but SolarCity is not Elon Musk (although Elon does own shares, roughly 6 million of which he curiously pledged as collateral with Goldman Sachs - which happens to be providing tax equity for SCTY and has been the lead banking relationship on TSLA).
We expect our report to be released next week, but in the interim, we would strongly caution traders and retail investors from overstaying their welcome (unless of course this is 1999 again). Our analysis of fair value is somewhere between the IPO price ($8.00) and $12.00 per share.