This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Pump and dump
Well, folks, it's been a little over three weeks since Elon Musk IPO'ed SolarCity (NASDAQ: SCTY  ) , the second of his three businesses designed to redesign the world. And you know what that means: The underwriters who foisted this unprofitable pump 'n dump had their gag orders lifted yesterday, and out came the recommendations:

  • Bank of America -- buy 
  • Roth Capital -- buy 
  • Goldman Sachs -- buy 
  • Needham & Co. -- buy 
  • Credit Suisse -- buy!

Okay. Technically, that last one was an "outperform." But you get the gist -- Wall Street is hooting, hollering, and pounding the table with both wingtips, urging investors to buy this stock. But why?

Estimates of how much SolarCity shares could be worth a year from now range from a modest $17 estimate at Needham, all the way up to Bank of America's $21 target. Of course, the shares already cost more than $16 a pop. So it's hard to see why Needham, for example, is so hot and bothered over a potential profit of... 5%.

Or is it?

Underwriters rejoice!
Call me a cynic, but I can't help but think it's more than a coincidence that every single one of the analysts who told us to buy SolarCity yesterday... also underwrote the company's stock offering last month. Of the five, Goldman Sachs has the most obvious conflict of interest, inasmuch as the 4.8 million shares it underwrote in the SolarCity IPO put its reputation at most risk if the stock decides to tank.

But Credit Suisse's risk is not insubstantial, either. CS underwrote 3.6 million shares in the December offering. B of A took on 2.5 million shares. Needham and Roth, 287,500 each. And, of course, there was a 1.7 million overallotment option on the table as well...

There could be more than just reputations at risk here, too. As a general rule, when a banker agrees to underwrite a stock offering, failure to sell the shares can result in the banker having to buy the stock itself. (Remember Facebook?) In short, if SolarCity doesn't do well, these bankers could take a financial, as well as a reputational, hit.

What could possibly go wrong?
Granted, there are reasons for being optimistic about SolarCity's chances -- and the bankers' chances of being right about it hitting $17, $18, or even $21 a share. For one thing, last week SolarCity issued new guidance suggesting its pace of solar panel installations is rising strongly, and could be up 60% in 2013, over 2012 levels. For context, the 250 million megawatts SolarCity plans to install this year are nearly as much as the 290 million megawatt Agua Caliente solar project that First Solar (NASDAQ: FSLR  ) recently sold to Berkshire Hathaway. And according to Goldman, SolarCity could keep up the growth for many years to come, averaging 30%-35% compounded growth through 2016.

In short, it may have only just IPO'ed, but SolarCity is already a major player in this market.

For another thing, the supply glut of solar panels on the market continues unabated. That may be bad news for unprofitable solar manufacturers like Trina Solar (NYSE: TSL  ) and SunPower (NASDAQ: SPWR  ) But it's very good news indeed for SolarCity, which gets to buy cheap panels, then install them on customers' rooftops and collect a nice, steady revenue stream from them -- fatter and fatter profits, the more panel prices plunge.

What could go wrong
But let's not get ahead of ourselves. Remember: SolarCity's rapid growth owes largely to the deal it's offering consumers. Needham described to StreetInsider.com how it works: "SolarCity [offers] solar leases at lower rates than retail electricity." On the one hand, this can't-lose proposition has helped SolarCity to "rapidly [grow] to become the largest player in the retail solar market." On the other hand, it's hard to see how SolarCity could fail to become popular, offering consumers such a can't-lose proposition.

So far, however, it's been a must-lose proposition for SolarCity itself, which has paired rapid revenue growth with mounting GAAP losses on its income statement.

Foolish final thought
Elon Musk owns three companies right now: SolarCity, electric buggy maker Tesla Motors (NASDAQ: TSLA  ) , and private space launch pioneer SpaceX. Only one of those companies (SpaceX) is currently profitable. But it's the unprofitable companies, the ones burning cash and losing money -- Tesla and SolarCity -- that Musk has foisted upon the markets. While permitting unsuspecting individual investors to shoulder the losses at Tesla and SolarCity, Musk is keeping profitable SpaceX for himself.

Gee, I wonder why?

I also wonder why investors would willingly take advice from conflicted bankers, and pile into shares of SolarCity at a time when it's reporting GAAP losses at the rate of $47 million a year, and burning through cash at the rate of $315 million a year. That doesn't sound like smart investing to me.

But then again, I didn't underwrite the IPO.

Near-faultless execution has led Musk creation Tesla Motors to the brink of success, but the road ahead remains a hard one. Despite progress, a looming question remains: Will Tesla be able to fend off its big-name competitors? The Motley Fool answers this question and more in our most in-depth Tesla research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2013, at 10:59 AM, AdvanderMeer wrote:

    Not quite sure what to think of this article. If it's a serious attempt at journalism it fails. If it's an attempt at Jim Crameresque entertainment, it's not my cup of tea but Jim Cramer has a serious audience too.

    If it's an attempt to sell me MF research, it fails miserably as I can't take a source seriously that cherry picks the facts it choses to use.

  • Report this Comment On January 09, 2013, at 12:34 PM, chastenruin wrote:

    Don't interject your personal bias into your article or anything.

    For one, Solar City is a financing company that sells Solar Panel installation. It's just like any other finance company providing auto or home loans. It's a business model that has worked for 100 years. Like you said, it even gets better for them as panel prices drop. They will get monthly cash flow over the course of their loans to customers. Of course losses will be generated up front, but its the long game that matters.

    For two, Tesla doesn't need to worry that much about their competitors. Why? Because they are in bed with them. Tesla is more than just an "electric buggy" company. Those buggies won Car of the Year in multiple publications. They are a primary supplier for all the majors who are buying electric drive trains from Tesla to make their own EV cars. They are literally sleeping with their enemy, and they are enabling their competitors entry into the same market. In the end its a win-win situation for Tesla because now the majors are also invested in putting EV infrastructure in place in order to better facilitate sales of their own vehicles. It's not Tesla against the rest of the auto industry, its Tesla ENABLING the rest of the auto industry.

    Did you even think through your analysis?

  • Report this Comment On January 10, 2013, at 5:20 AM, wjsteiner wrote:

    It makes me think about the reliability of articles if the basic math and physics is not understood. 290 million megawatts (MW) is quite a bit of power. Agua caliente is a fraction of that, 290 MW "only".

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