What: Shares of SolarCity (NASDAQ:SCTY), a residential and commercial solar energy system installer, retailer, and lessee, dropped $3.29 per share, or close to 6%, in Thursday's trading session to close at $53.81. The drop followed the release of SolarCity's fourth-quarter earnings report on Wednesday after the closing bell, and a modest price target increase from Canaccord Genuity.
So what: According to Canaccord Genuity's covering analyst Jed Dorsheimer, who kept a firm buy rating on SolarCity's shares, the company remains poised for long-term success despite reporting a net loss in its most recent quarter.
Specifically, Dorsheimer and his team are forecasting 920 MW to 1 GW of solar deployments in 2015. Even though Q1 revenue estimates from the company were a bit lighter than what Dorsheimer was looking for, the company's booking number for Q1 would insinuate that it's on pace for a record number of orders and a ramp-up of orders into Q2 and Q3. Dorsheimer reminds investors that the winter months are often slower because of weather factors beyond SolarCity's control.
Additionally, Dorsheimer and his team pointed to SolarCity's reduced installation costs (from $2.19 cost per watt to $2.09) as a catalyst. Dorsheimer's view is that this cut has more to do with increased productivity and efficiency than anything else.
Ultimately, Canaccord Genuity set a price target of $67 on SolarCity, a 25% premium to yesterday's closing price.
Also, as a refresher, SolarCity reported the deployment of 502 MW in the fourth quarter, including a more than doubling in residential deployments, and added a grand total of $3 billion in future contract payments throughout the entirety of 2014. However, its net loss of $1.47 per share was $0.20 wider than the consensus loss estimate of $1.27, and its Q1 EPS loss forecast for a net loss of $1.75 to $1.65 was considerably worse than current expectations.
Now what: The question investors have to ask themselves, here, is whether or not SolarCity has the capacity to rise 25% from its current level and brighten up their portfolio.
Personally, while I like the scalability of the business and can clearly see that SolarCity is headed in the right direction on cost controls, I have a hard time paying in excess of $5 billion for a company that's probably not going to be profitable on a GAAP or even adjusted basis for years.
But, as my Foolish colleague Jason Hall pointed out, a bulk of the spike in expenses recently are for one-time or non-recurring expenses, including the Silevo acquisition. Once SolarCity can get these expenses off its book in 2016 or beyond, we should see a sizable reduction in its expenses, and hopefully its bottom-line losses. Not to mention, SolarCity is growing like wildfire since its platform offers users the ability to buy as well as lease.
While I do see a premium being paid for SolarCity's first-in-class status, I'm not sure a valuation approaching $7 billion (assuming Canaccord's target price) is appropriate when it hasn't shown the ability to turn a profit. For the time being, I'd suggest only investors with an extremely high tolerance for risk and volatility consider this stock.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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