Which of These 3 Solar Companies Can Make You Rich?

Editor's note: A previous version of this article overstated the efficiency of First Solar and SolarCity panels. The Fool regrets the error.

SCTY Chart
SCTY data by YCharts

Solar stocks such as First Solar (NASDAQ: FSLR  ) , SunPower (NASDAQ: SPWR  ) , and SolarCity (NASDAQ: SCTY  ) have been some of the hottest stocks of the last 18 months.

With a market potential of $2.2 trillion and the International Energy Agency estimating that $2.55 trillion/year will need to be spent on total energy and efficiency infrastructure through 2035, one can understand why Wall Street has fallen in love with these companies. 

However, at The Motley Fool we believe in a long-term buy and hold strategy of great companies with strong growth prospects. This article will look at these three solar companies and attempt to answer the question: Can long-term investors still make money at these prices?

First Solar: profitable but too big to grow
First Solar is the largest solar company by market cap and production capacity, shipping 2.7 gigawatts (GW) of solar panels last year and guiding for 2.8 GW in 2014.

There are three main problems First Solar faces: its large size, inferior technology, and share dilution. 

First Solar has just secured financing to build the largest solar project in Latin America, the Luz del Norte power plant in Chile, which will be 141 MW. In 2013 Chile's economy grew at 4.1% and it faces the challenge of expensive electricity. Its government has set a goal of 20% solar power generation by 2025 to help the economy grow while lowering power costs and cutting carbon emissions. The reason for such a bold goal? Chile is blessed with some of the best solar potential on earth with its Atakama desert experiencing the highest solar radiation levels on earth. First Solar won the contract because it uses Cadmium thin-film panels which handle extremes of temperature better than silicon panels. 

But if First Solar is doing so well in a promising market like Chile, then why the negative earnings growth projections? The answer lies in scale. The Luz del Norte project is 141 MW, representing strong growth for Chile's solar industry, which installed just 150 MW in 2013. 

However, given First Solar's massive scale, even a couple hundred MW won't move the needle and First Solar's thin-film panels are only 13.5% efficient compared to 21-23% for SunPower panels and 15-17% for SolarCity's panels.

Chile's extreme climate may call for thin-film panels, but the majority of the world cares more about efficiency, which directly affects cost.

Finally, First Solar, like SunPower and SolarCity, faces the problem of large share dilution. 

FSLR Revenue (Annual) Chart
FSLR Revenue (Annual) data by YCharts

As seen above, all three companies have high annual dilution rates:

  • First Solar: 9.7% 
  • SunPower: 6.3% 
  • SolarCity: 13.8%
With First Solar's revenue growth stalling due to its large size and inferior technology, the company's high dilution and slowing growth means the share price will struggle to grow over the next decade.
 
SolarCity: great company, bad investment 
SolarCity has a wonderful long-term business model. It installs solar systems on homes and businesses at no cost to owners, who sign a 20-year contract to pay for the electricity generated. SolarCity is growing like a weed on steroids, guiding for 70% CAGR customer growth through 2018. 
 
How can I be opposed to such an investment? For two reasons: escalating costs and share dilution.
 
The US recently imposed steep tariffs on Chinese imported solar panels, which SolarCity was using for its systems.
 
In response SolarCity spent $200 million to purchase panel maker Silevo, which is working on panels with 24% cell efficiency that would reduce the amount of panels needed by 25% and greatly cut costs.
 
So what's the problem? SolarCity is guiding for 1,400 MW to 1,650 MW of installations through 2015 yet Silevo's manufacturing capabilities are just 32 MW annually. 
 
With just $320 million in cash, a potential extra $150 million payment to Silevo and $734 million in expected losses through 2015, SolarCity likely won't be able to increase Silevo's production or achieve its growth goals without raising substantial amounts of additional capital. In fact, SolarCity has stated that it intends to invest $500 million into expanding Silevo's capacity to 1 GW within the next two years. With $710 million in current debt
my concern is that SolarCity will accelerate its share dilution rate in order to raise these sums. Given its already high valuation of 32 times sales, accelerating dilution will slow eventual earnings growth (once SolarCity is profitable) and act as a drag on long-term performance.
 
SunPower: profitable best of breed
SunPower is the best solar company investors can own for three reasons: its superior technology and its distributed generation business gives it a strong growth catalyst. 
 
SunPower's has tested panels with pre-production cell efficiency of 25% and that are five times more reliable than its competitors' products, delivering 75% more power over a 25-year period.
 
SunPower is also leasing private solar power systems under long-term contracts. By 2015 it estimates it will have doubled its customer base to 300,000 and more than tripled its contracted cash flows relative to 2012.
 
Foolish bottom line 
First Solar, SolarCity, and SunPower will all grow their businesses in the next decade. However, SunPower, with its superior technology, strong growth catalyst, and minimal dilution, is likely to result in the best long-term returns. SolarCity is an innovative company with a terrific business model and strong growth ahead of it, but massive shareholder dilution is likely to slow long-term share appreciation. Meanwhile, First Solar will continue to struggle to win contracts and grow sales unless it can greatly improve the efficiency of its panels to match its competitors. 
 

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

 
 

Read/Post Comments (21) | Recommend This Article (8)

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 July 08, 2014, at 4:25 PM, plange01 wrote:

    solar city will show more growth and better returns than the rest of the top five solar companies put together...

  • Report this Comment On July 08, 2014, at 7:24 PM, AdamGalas wrote:

    Maybe in the short-term, say the next year or two. The market is hitting new highs and the economy looks like the recovery is starting to take hold.

    But the fact is that SolarCity will need to raise several billion dollars over the next few years if it wants to reach its 10 GW Silevo target and I wish it the best I really do.

    But how much debt can it take on and how much equity issuances will it take to get there?

    I look at SolarCity as I would a Lexus. A new lexus will lose 20% of its value the moment you drive it off the lot. Better to buy one slighly used and avoid that hit.

    The same with SolarCity. Initial investors are going to get diluted up the wazoo, maybe 200-300%. Now, they might not care because the market might see the stock price soar 1000% so to heck with the share count or valuations right?

    Well the next time there is a correction SolarCity will get hammered, could lose 50%. The next time a recession hits, it could lose 75%. Another crash like in 2008-2009? 90%.

    Don't get me wrong, I think Elon Musk is Walt Disney, Thomas Edison, Nikola Tesla and Steve Jobs all rolled into one. He is iron man and I think he might literally save the world.

    I have no doubt that Tesla and SolarCity will succeed stupendously. The only question is when I'm buying them.

    Just as I'd let someone buy that Lexus new before buying it slightly used, but at a massive discount, I'll wait for SolarCity to raise cash through dilution, expand immensely, then buy after a major crash that is inevitable within the next few years.

    Believe it or not, I look at SolarCity as a future dividend dream stock. Its a new kind of utility and it will make long-term income investors very rich...one day. But I don't think that day is today.

  • Report this Comment On July 09, 2014, at 1:48 PM, clanza875 wrote:

    Wow I'm beginning to think the motley fools are on the SPWR payroll. Never have I seen one company so far off the mark.

    1 FSLR dilution has already occurred and is factored into current price. As far as I'm aware they have the best balance sheet by far and don't need to do an additional offering. SPWR has 30-40 million more shares coming on the market in the next 5-10 years through warrants to total and convertible debt offerings. Why haven't you mentioned this?

    2 These MF articles go on and on and on about efficiency. Yet no one seems to understand that the additional efficiency costs more to manufacture eating up profit margins on the cost side. Monocrystalline technology that SPWR uses is also the most expensive to manufacture by a wide margin. FSLR has already caught up to multicrystalline tech efficiency with their "inferior" technology on a cell level. It will take some time to get it into their modules but they're coming. FSLR will catch up to mono as well leading to increased market share while maintaining large profit margins due to lower costs to manufacture.

    3 SCTY has a mkt cap close to FSLR with revenues 60 times less and negative earnings so it looks like growth is already priced in. SPWR is similar though not as extreme. Both companies are losing money on rooftop sales but SPWR is able to show profits based on their large utility scale project.

    4 Why no mention of FSLRs tetrasun panel due out in the 2nd half of 2014? It's for rooftop sales and it supposedly has equal efficiency but costs much less to manufacture meaning they'll be the only provider to actually be profitable in rooftops.

  • Report this Comment On July 09, 2014, at 3:38 PM, CalCase wrote:

    My bet is on Musk he has been able to wow us at every turn to date. So what do I expect from SCTY is 7 to 9 years of 100% Y/Y growth. I expect he will develop a all new solar panel that replaces a conventional roof with efficacies the like of nothing we have seen.

    A true market disruptor.

  • Report this Comment On July 09, 2014, at 5:04 PM, clanza875 wrote:

    Musk is to busy trying to put people on Mars. I'll stick with FSLR.

  • Report this Comment On July 09, 2014, at 5:16 PM, AdamGalas wrote:

    Nice to see a discussion starting. Some thoughts.

    1. Clanza875 thank you for bringing SunPower's warrents and convertible debt to my attention. I wasn't aware of that, but will look into it. Assuming your information is accurate than 30-40 million additional shares would represent 4.5% - 5.5% annual dilution. Troubling, but actually less than SunPower has recently been doing, so the trend is in the right direction.

    2. Thin films are inherently less efficient than silicon panels with several layers. That is a rule based on physics and I doubt First Solar will be able to catch SunPower or SolarCity in terms of efficiency.

    They recently achieved 17% cell level efficiency but their current modules are 13.5% efficiency.

    SunPower recently achieved 25% cell level efficiency though module efficiency is always 1%-3% less.

    Silevo thinks they can eventually reach 26.5% cell level efficiency. Whether or not this is achievable or at what cost has yet to be seen, but I highly doubt a thin film cell can ever hope to achieve those levels.

    As for Tetrasun, those are 21% cell efficiency silicon panels. You claim that first solar's edge lies in thin films which are cheaper than silicon. That may be true but tetrasun has just launched and only time will tell if First Solar can undercut SunPower or Silevo when it comes to silicon panels. In other words, First solar may be king of thin films, but its playing in SunPower's sandbox now.

    3. CalCase, I too love Musk as the great innovator and disruptor of our age, but I'm not sure SolarCity is going to be inventing entire new classes of solar panels.

    They claim that Silevo can hit 26.5% in the future, which would mean module efficiency of 23.5-25.5% which might be able to cut module count by 28.5% per installation.

    The key, as Clanza875 said, is cost. A 30% efficient panel that cost 10x as much is no good, but SolarCity, with Musk as chairman shouldn't have any problem raising enough funds to achieve SolarCity's goal of 10GW Silevo production.

    It might cost $5 billion but Musk will get that money, whether it be with lots of debt or lots of shares, the market correctly believes in Iron Man and will give him what he needs to change the world.

    Personally I can't wait to see what SolarCity can do, I'm definitely rooting for them and eagerly looking forward to the next market crash when I can buy some at a price that makes sense, (at least to me).

  • Report this Comment On July 09, 2014, at 5:44 PM, AdamGalas wrote:

    Don't mock Iron Man's attempts to put people on mars. He might just build a special suit and fly them their himself:)

  • Report this Comment On July 09, 2014, at 7:31 PM, clanza875 wrote:

    With regards to the secondary offerings of SPWR the dilution only occurs if the stock price rises enough to exceed the strike price so presumably the company has to be successful to be diluted. However if they are not successful they will need to come up with 800 million in cash. This could be a lose lose for SPWR shareholders.

    On to efficiency, my understanding (and I could be wrong) is that both the CdTe technology FSLR uses, mono-Si that SPWR uses and multi-Si that the majority of Chinese companies use all have the same maximum theoretical efficiency of ~29%. They all have a current trade-off of cost for efficiency. Mono is the oldest and has been researched thoroughly for close to 60 years and there is nowhere left for them to go on the efficiency/cost curve. CdTe is the youngest technology, only around since the 2000s. Their technology can still be further developed to get closer to the maximum theoretical efficiency. In fact according to FSLR analyst day presentation CdTe has already matched the solar cell efficiency of multi at a lower cost. This is why many of the Chinese companies like TSL are now switching to mono cause multi has lost any advantage on the cost/efficiency scale. Over the long term FSLR technology looks to be the winner.

  • Report this Comment On July 09, 2014, at 10:49 PM, yahoo123 wrote:

    Adam Galas - Thanks for wonderful article.

    I am a paid member of Fool.com

    Most of the article are crap honestly but i like your article this have depth and knowledge. You did your research!!

    I brought SCTY at average price $35 last year never sold single one!

    What do you think fair value for SCTY/S after sell off!

    I don't think it will reach at $30-$35 again so easily. Company have grown up now. Yes they have debt but same time they are making money monthly, from one side too, may be small amount but it is growing everyday.

    Please Keep writing...... good article.

  • Report this Comment On July 10, 2014, at 12:58 AM, AdamGalas wrote:

    There is a physics principle called the Shockley-Queisser limit that says that the maximum possible efficiency for an ideal single layer, single junction cell is 33.7%. For silicon panels the maximum is indeed 29%.

    For multiple layer panels the max is 86% though that requires an infinite number of layers and concentrated sunlight, ie mirrors.

    The records for solar efficiency are 40.7% for solar-thermal using mirrors by Sandia labs and 42.8% in Arizona by Tuscon electric power.

    The cost of solar-thermal can be 2-3x cheaper than top efficiency photovoltaics so Clanza875 is correct in that such trade offs are a major concern.

    MIT claims to have a process called singlet fission in which an organic compound called pentacene is applied to a solar panel and allows visible light to knock 2 electrons loose instead of just one.

    Theoretically this could greatly increase efficiency past the Shockley-Queisser limit, though they have only been able to reach 2% efficiency.

    Singlet fission may have applications when it comes to thin-films however its so theoretical that no solar company is yet doing research into this approach.

    As for Clanza's argument that thin-film will eventually catch silicon panels either in absolute or cost adjusted terms I would respectfully argue that this might not be the case.

    After all, Tetrasun, First Solar's own rooftop solar attempt, is based on silicon panels, not thin-film.

    As Clanza has said, First Solar is the leading maker of thin film panels, they have the best R&D in this field.

    If First Solar has decided to try for distributed generation ala SolarCity and now SunPower, and they choose to go silicon panel instead of thin-film, which is their expertise, then I take that as an admission that for roof-top solar silicon is more cost effective.

    As for Yahoo123's question about SolarCity's fair value its a tough question.

    SolarCity is trading 25% off its high yet still at 32 times sales.

    Today while writing an article on GT Advanced Technologies I realized that some growth companies can't be valued with standard metrics, because, like small cap biotech stocks, their success is digital, not analog.

    A blockbuster drug is either approved or not. GT will either hit it big with Apple's use of sapphire and its revolutionary solar tech or it won't.

    SolarCity is more analog. Its success isn't either 0% or 100% but a matter of degrees.

    My point in this and my previous article is that growth stocks in general are harder to do well than dividend stocks because at least dividend payers offer two ways to earn a return.

    Growth stocks have only earnings per share growth and in the short-term hype, to fuel share price growth.

    Since The Motely Fool advocates long-term investing eps is going to be the only thing that matters in the end.

    SolarCity won't be profitable for many years, with eps expected to get worse, not better through at least 2015.

    The company does expect to be cash flow positive by the end of 2014 but with its latest Silevo growth plans that guidance is pretty much out the window.

    For a long-term investor like me its hard to put a fair value on SolarCIty because the closest thing to cash flow the company has is retained value which is $1.4 billion.

    Discounting that over 20 years using the standard method would require a 53% discount rate. If one treats SolaryCity's cash flows like a fixed annuity, then its retained value, when discounted over 20 years, in order to determine the present day value of that $1.4 billion is only $2. A ridiculous number because the stock has a beta of 5.66.

    In the short-term the fair value is whatever the market price is.

    If you're asking me what price I'd be a buyer, well I wouldn't buy until after the next correction at least.

    SolarCity will crash sometime in the next 2-3 years, because corrections happen, even in bull markets.

    A 20-30% stock market fall will happen, even if the economy improves and with a beta of 5.66 SolarCity is going to get hammered when it does.

    The higher it climbs right now, the faster it will fall when fear returns to the market.

    However, because I feel you deserve an answer I'll stake a claim on this:

    I'd recommend long-term investors initiate an initial position at 50% of today's price, as part of a "buy in thirds" plan.

    Personally I'm a high-yield investor but I love the company so much that I'd buy it myself but not until its 2/3 cheaper.

    Those price points are based on things as they stand now, meaning SolarCity's finances, installation base and current growth plans.

    I'll adjust those prices upwards as the company grows but right now, as things stand I'm pretty sure investors will have a chance to buy SCTY for $20 or less within 3 years. At that time I'll be buying right alongside you.

  • Report this Comment On July 10, 2014, at 8:27 AM, clanza875 wrote:

    Thanks Adam for the very detailed reply. This field is very interesting and future technological breakthroughs could really wind up going anywhere.

    Absolutely Silicon is currently more cost effective for restricted space applications. FSLR had to make a move on Tetrasun, even if their CdTe panels eventually catch up. They bought Tetrasun for a song, the terms were not disclosed but at the end of the quarter there was no discernible difference in the balance sheet. This allowed FSLR to diversify their product line and they could get in on the growing restricted space market (even though its currently profitless and break-even at best). Had they waited they would lose out in terms of market share.

    FSLR's main technology the CdTe panels have a significant advantage over silicon when temperatures are above 80 degrees F. They also have a distinct advantage in humid conditions. Since Tetrasun is aiming for the Japenese and US rooftops where the climates are not as harsh it makes more sense to use a Silicon product. However, when it comes to building large scale power plants (which are currently very profitable) in the desert it makes more sense to use CdTe panels due to their superior performance in harsh weather conditions.

    As far as SCTY is concerned I think we mostly agree that it is more of a lottery ticket than an investment. For a company that was primarily a glorified installer of solar systems to move into manufacturing is a risky move. Not only are they far from profitable but now they have to come up with an R&D budget to be able to compete with FSLR and SPWR.

  • Report this Comment On July 10, 2014, at 9:17 PM, AdamGalas wrote:

    Clanza makes a good point. Most panel makers are losing money, and Silevo, at 32 MW of capacity is probably unprofitable as well.

    Expanding that capacity 330 fold over the course of the next few years will require up to $5 billion, based on managements $500 million to ramp up to 1 GW capacity.

    http://www.fool.com/investing/general/2014/07/10/beware-grea...

    Over at another SolarCity article, a commenter throttled me for claiming that SolarCity will use equity and not debt to pay for this enormous build out. He pointed out that the Silevo purchase was with stock, not cash.

    Well that only proves my point. SolarCity didn't issue debt to buy Silevo because its shares, as overvalued as they are, make far cheaper currency.

    Tesla issued $2 billion in debt and got downgraded to junk status. This means far higher interest rates in the future, never mind that's where long-term interest rates were already going.

    With Musk as SolarCity chairman, and SolarCity being so much smaller than Tesla, borrowing $6 billion or so that will be required by 2020, (-$785 million levered free cash flow) would mean borrowing $5 billion after getting downgraded to junk status.

    With interest rates already set to climb, the interest payments would decimate SolarCity's cash flows for years to come.

    With its stock trading at 32X sales the smart move is to use that stock as currency. Which is why I can't recommend SolarCity at this time.

    When the smart move dilutes and harms existing shareholders I'd rather save up and prepare for the day when no more dilution is necessary and positive free cash flow is enough to allow cheap debt to fuel further expansion.

  • Report this Comment On July 10, 2014, at 9:17 PM, AdamGalas wrote:

    Clanza makes a good point. Most panel makers are losing money, and Silevo, at 32 MW of capacity is probably unprofitable as well.

    Expanding that capacity 330 fold over the course of the next few years will require up to $5 billion, based on managements $500 million to ramp up to 1 GW capacity.

    http://www.fool.com/investing/general/2014/07/10/beware-grea...

    Over at another SolarCity article, a commenter throttled me for claiming that SolarCity will use equity and not debt to pay for this enormous build out. He pointed out that the Silevo purchase was with stock, not cash.

    Well that only proves my point. SolarCity didn't issue debt to buy Silevo because its shares, as overvalued as they are, make far cheaper currency.

    Tesla issued $2 billion in debt and got downgraded to junk status. This means far higher interest rates in the future, never mind that's where long-term interest rates were already going.

    With Musk as SolarCity chairman, and SolarCity being so much smaller than Tesla, borrowing $6 billion or so that will be required by 2020, (-$785 million levered free cash flow) would mean borrowing $5 billion after getting downgraded to junk status.

    With interest rates already set to climb, the interest payments would decimate SolarCity's cash flows for years to come.

    With its stock trading at 32X sales the smart move is to use that stock as currency. Which is why I can't recommend SolarCity at this time.

    When the smart move dilutes and harms existing shareholders I'd rather save up and prepare for the day when no more dilution is necessary and positive free cash flow is enough to allow cheap debt to fuel further expansion.

  • Report this Comment On July 10, 2014, at 10:33 PM, CalCase wrote:

    Gov. Como has agree to provide the infrastructure that represents 50% all day long. The rest will be financed dirt cheep cant wait to see the details. SIlevo was another killer Musk deal all stock and shuffle them off to Buffalo.

    infrastructurehttps://www.governor.ny.gov/press/06172014-statement-from-gov-cuomo

    New panels: Lyndon Reive in the attached article saying : " Attractive panels that will make the the home look better" thought that was a hint.

  • Report this Comment On July 11, 2014, at 8:22 AM, clanza875 wrote:

    I have to agree with Adam. Since the market currently values SCTY at 40 times annual revenue they would have to be foolish not to use additional equity to finance their expansion plans.

    The best case scenario for SCTY is to one day have financials that come anywhere close to what FSLR and SPWR are doing now. Yet SCTYs market cap is more than SPWRs and just slightly less than FSLRs.

  • Report this Comment On July 11, 2014, at 4:48 PM, AdamGalas wrote:

    Calcase thank you for that link. It's a very informative piece. Looks like Silevo's phase 1, which is expansion from 32 MW to 1GW capacity, will cost $750 million. Being owned by SolarCity that will fall on their shoulders.

    Its actually $250 million higher than other figures I'd heard quoted. Hopefully that doesn't mean that 10 GW will cost $7.5 billion, because that would be 50% more than than Tesla's gigafactory.

    Funding that cost Tesla its credit rating and Tesla has Panasonic as a major partner in that venture.

    With SolarCity's projected losses of about $750 million through 2015, that kind of undertaking would require perhaps $9-$10 billion in total financing through 2020.

    I wish SolarCity and its shareholders the best. Hopefully the market doesn't crash (though I do want it too so I can buy great companies cheaper) and the shares keep moving upwards. That will let SolarCity raise its needed funds with minimal dilution and prepare a day for when I can buy shares, (after the aforementioned crash).

  • Report this Comment On July 12, 2014, at 12:02 AM, yahoo123 wrote:

    Guys keep dreaming $20/s of SCTY!

  • Report this Comment On July 12, 2014, at 12:50 PM, AdamGalas wrote:

    A 60-70% drop in SolarCity's share price is not unreasonable to expect should a recession or correction occur in the next year or two. Statistically we are due for one.

  • Report this Comment On October 15, 2014, at 7:55 PM, tombland wrote:

    Adam, how does SolarCity's new solar bond offering announced today change your view, if at all?

  • Report this Comment On October 15, 2014, at 11:32 PM, AdamGalas wrote:

    SolarCity has been doing a lot to address the critics who've questioned their ability to succeed in a more challenging environment of constantly declining solar system prices.

    One of these is their new loan program to help customers buy solar systems instead of lease.

    While this is necessary, since the long-term economics of ever cheaper solar systems makes buying instead of leasing via a PPA a smarter choice for consumers, the problem is that the margins for these sales are 75% lower than the leases that have dominated their rapid growth thus far.

    Similarly these new unsecuritized bonds represent a great thing for the company, assuming they can sell them all.

    As my TMF colleague Travis Hoium pointed out today:

    http://www.fool.com/investing/general/2014/10/15/solarcity-c...

    The 4% interest they are wanting for 7 year bonds (1% for 1 year bonds) represents super cheap capital, cheaper than even the securitized solar bonds they've been issuing that are backed by cash flows from their PPAs.

    As a prospective shareholder I do want to see the company maximize the amount of low cost capital they can raise to grow as fast as possible, (tax equity funding represents 9%-12% cost funding) but I am still not a buyer, even at these prices.

    The reason is two fold. First, I'm greatly concerned about their capital expenditure plans, aka the solar panel gigafactory they plan to build.

    I'm just not sure that all the time, effort, and most of all, likely billions of dollars they plan to spend to build 11-21 GW of solar panel capacity (Elon Musk has stated this is their eventual goal), is feasible with interest rates likely to rise soon.

    I think this $200 million tranche of bonds is a "feeler" to see how the market takes them. If they sell all $200 million I expect SCTY to float a lot more of these bonds in the future. Their Silevo plans and ambitious growth plans simply demand it be so.

    The only other option is to dilute the heck out of shareholders and with the market seemingly sprinting to a correction and SCTY shares in a near free fall the last few months, issuing more shares is not likely to go over with existing shareholders.

    That is a major concern I have with SCTY. They may be able to sell billions in cheap bonds like the ones they announced today, but then what?

    They would be burdened by a mountain of debt, that they would likely have to role over in a few years, at potentially higher interest rates.

    And with the solar tax credit that supplies 62% of their current funding going away at the end of 2016, they are going to need a lot of debt and or equity issuances if they hope to achieve their 1 million customers by mid-2018 target.

    My concern is that SCTY may issue another few billion in bonds over the next year, but then have no choice but to sell shares to raise more cash to keep growing/build the solar gigafactory.

    What if those equity sales have to occur at the bottom of a bear market? That would mean that SCTY might need to dilute shareholders by 2, 3 or even four times more than they would have if shares were trading at their recent sky-high valuations.

    Also keep in mind that SCTY's recent acquisitions, which management says have been vital to their growth success thus far, have been all stock deals.

    With the stock plunging, and the market not even in a correction yet, (it could easily drop another 25%-30% based on historical bear markets) SCTY's shares might have another 50%-60% to drop yet.

    That is especially true if the company is able to achieve its ambitious 1 million customer growth but on the back of a high percentage of sales instead of more lucrative leases.

    Sales means no recurring cash flows, which the company touted as the corner stone of their "solar utility" business model.

    Recurring cash flows are also needed to service the large amount of debt I fear SCTY will need to keep growing.

    If the solar loan program proves a hit, then SCTY's margins will compress as they have quarter after quarter, and shares will have a fundamental reason for declining.

    At that point SCTY won't be able to acquire anyone other than by paying cash, which will need to be raised through debt or equity offerings. Either one will end up potentially hurting existing shareholder's prospects for future returns, which is why I would wait to see if this is a true correction, and even then stick with what I believe to be the two best solar stocks.

    I'll be publishing an article soon explaining what those two are so stay tuned.

  • Report this Comment On October 16, 2014, at 4:27 PM, tombland wrote:

    Thanks for all the detail Adam.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3021581, ~/Articles/ArticleHandler.aspx, 12/17/2014 6:25:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement