It's been a rough couple of years for investors in SolarCity Corporation (NASDAQ:SCTY.DL) -- years in which SolarCity stock has climbed as high as $70 a share, but also sunk as low as $17. As of yesterday, SolarCity stock was down 60% over the past 52 weeks.
But there may finally be some good news in store for shareholders: Banker R.W. Baird has just upgraded the stock. Maybe, just maybe, 2016 could still become SolarCity's best year yet.
Here are three things you need to know about the upgrade.
Thing No. 1: Baird sees a bright future
Upgrading SolarCity stock to outperform, and assigning a price target of $37 to the shares, Baird is predicting that investors who buy into SolarCity today could earn almost a 60% profit -- coincidentally, the same amount the stock has fallen over the past year.
Why? Worries over mounting debt and absent free cash flow have dogged SolarCity stock in the past. But last month, SolarCity announced that it has raised $227 million worth of cash equity financing from John Hancock Financial. And the month before that, SolarCity raised $188 million in financing from Bank of America. In a report written up on StreetInsider.com this morning, Baird argues that this and other "financing transactions ... should help the balance sheet/liquidity argument," and give SolarCity the carbon dioxide it needs to continue photosynthesizing its way to profit in years to come.
Thing No. 2: But the math is tough
To an extent, Baird is right. The $415 million in financing the Solar City just raised will certainly help to keep the company solvent. But at the same time, it's worth pointing out how difficult the math is becoming for SolarCity.
Free cash flow-negative from its inception, SolarCity's business turned operating cash flow negative two years ago, and has been burning increasing amounts of cash ever since. According to data from S&P Global Market Intelligence, SolarCity's operating cash flow for the past 12 months has been negative $812 million. Capital spending surged to $2 billion in the same period. As a result, SolarCity is currently burning through cash at the rate of $2.8 billion per year.
Not to put too fine a point on it, but $415 million in financing won't be enough to snuff out that cash bonfire. It won't cover even two months' worth of cash burn at SolarCity.
Thing No. 3: Help from China...and Canada?
So how does Baird believe it can make the math work, and recommend SolarCity? Well, it helps that the folks who make the solar panels that SolarCity installs are in similarly dire straits. Canadian Solar (NASDAQ:CSIQ), one such supplier, is reporting GAAP profits now, but continues to burn cash. Likewise with Trina Solar (NYSE:TSL). And Yingli Green Energy (NYSE:YGE), yet another SolarCity supplier, says its producing cash -- but under GAAP accounting, it's been losing money for five years straight.
So what do tough times for Canadian Solar, Trina Solar, and Yingli Green Energy mean for SolarCity? Well for one thing, so long as they hang on and remain in business, scrabbling for sales at any price, there's a "potential [for] module oversupply," says Baird, which "could help SCTY to reduce costs in 2H:16."
The most important thing: Time
The longer Canadian Solar, Trina, and Yingli hang on then, the better it is for SolarCity. But these suppliers may have to hang on, and continue selling cheap solar panels to SolarCity, for a very long time before investors in SolarCity ever see their company earn a profit.
According to analysts polled by S&P Global, SolarCity will continue losing money at least as far out as 2018. Analyst projections for GAAP earnings don't go out any farther than that (an ominous fact in and of itself). Meanwhile, the few analysts who have ventured an opinion on cash profits see SolarCity continuing to burn cash like crazy, into 2020 and beyond. In fact, if analyst projections are right, by 2020 SolarCity could be burning cash at an even faster rate than it already is today.
So what's the upshot of all the above? Somehow, somewhere in all this bad news, Baird sees a reason to own SolarCity stock. I disagree.