SunEdison (NASDAQOTH:SUNEQ) lowered its fourth-quarter and full-year guidance yesterday, and the stock has been punished with a drop of 6.2% as I'm writing. It didn't help that the guidance downgrade coincided with a proposed $400 million convertible notes offering, which is intended to pay off current debts but could come with major dilution for existing shareholders.
Is this a reason to sell off shares of SunEdison or other solar stocks? To answer that we need to take a long-term view.
The new solar financing of choice
SunEdison's proposed convertible notes offering comes in the same year that SunPower (NASDAQ:SPWR) and SolarCity (NASDAQ:SCTY) have made similar transactions, so it's certainly not alone. Solar companies are using convertible debt more frequently because it doesn't come with the same high interest rate as normal debt and gives a lot of growth flexibility if stock prices go up and the debt is converted into equity.
The downside for investors is that convertible debt acts like a share offering if the stock goes up and limits upside for investors.
A shift to owning solar systems
Another reason for these solar providers reliance on convertible debt is that it's relatively cheap financing for projects either in development or added to the balance sheet. In SunEdison's case, that's exactly the reason for the guidance downgrade.
SunEdison decided to keep solar projects on its balance sheet in the fourth quarter instead of selling them. There's no change to the amount of projects the company plans to finish, but systems sold guidance is being reduced from 234 MW-264 MW to a range of 209 MW-234 MW.
There is weakness in the company's semiconductor business, but I don't think that's enough to change the investment thesis since the segment will be spun off early next year.
SunEdison's convertible notes offering doesn't excite me, but I don't think it's a reason to be concerned about the company's future. The same goes for the decision to keep solar systems on the balance sheet instead of selling them. In fact, that will probably generate more value for shareholders in the long term.
In short, don't panic over today's stock move. The long-term picture for SunEdison is still improving and none of yesterday's announcements change that.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.