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Will SolarCity Repeat SunEdison's Mistakes?

By Jay Yao - Mar 1, 2016 at 10:00AM

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Will history repeat again or will SolarCity rebound from its disappointing fourth quarter results?

SolarCity Corp. (SCTY.DL) is in unfamiliar territory. The company reported bad guidance and its stock fell to levels not seen since 2013. True, some of the decline is due to Elon Musk falling out of favor with Wall Street. Musk's other company, Tesla Motors (TSLA 1.24%), is in a tough bind, as the market expects Tesla to increase the number of vehicles produced substantially and appears to be in danger of falling short of those expectations. Tesla shares have fallen by 37% year to date because of this dynamic. Some traders are selling SolarCity because Musk is a big holder in SolarCity and would potentially need to sell some shares if Tesla continues to fall. 

Image Source: SolarCity Investor Relations

Some of SolarCity's problems are due to the unsubstantiated fear that it could be the next SunEdison (SUNEQ). SolarCity and SunEdison were both solar companies that grew quickly in previous years. Both don't report profits in the traditional sense. Both also reported disappointing results as of late, with SolarCity recently reporting lower than expected first quarter installation guidance. Although the two companies certainly share similarities, there are three reasons to believe that SolarCity will avoid a SunEdison-like meltdown.

SolarCity hasn't made any terrible acquisitions
A big reason why SunEdison fell was because investors were disgusted that the company acquired Vivint Solar (VSLR) for so much. Unlike SunEdison, SolarCity hasn't made any big acquisitions in the past year, and doesn't need to spend hundreds of millions of dollars in cash because of it. The only acquisition SolarCity made in 2015 was acquiring a Mexican solar developer for $10 million in cash and potentially $5 million more in payouts. Because it doesn't need to spend cash for acquisitions, SolarCity isn't in danger of a liquidity crisis like SunEdison. Given SunEdison's horrible stock performance, SolarCity is also unlikely to make the mistake of acquiring other companies for a substantial amount of cash in the near term. 

SolarCity is easier to understand 
Another reason why SunEdison fell was because its financials were almost impossible to understand. Because SunEdison had two captive yieldcos, the company's financials were very complex. The complex financials made SunEdison seem like it had a lot of debt and kept many investors away when SunEdison's shares fell. SolarCity's balance sheet, on the other hand, is easier to understand. SolarCity doesn't have any external yieldcos. It can clearly show how it increases shareholder value through the rise in the net present value of its PowerCo's unlevered cash flow less debt. With yieldcos out of favor with Wall Street, SolarCity is unlikely to make the mistake of forming an external yieldco and complicating its financials.

Management credibility
While Elon Musk isn't the CEO of SolarCity, Musk is the Chairman, and his reputation as a technology genius can support SolarCity. Elon Musk has many deep-pocketed friends in Silicon Valley. Google at one time offered to buy Tesla for $6 billion when it seemed Tesla was destined to go out of business. Because Musk has credibility with many investors, those investors are more likely to step in and help Musk's companies when they need it. In contrast, SunEdison doesn't have that star power in its CEO suite and didn't have any big investors to halt the stock's decline.

SolarCity management will do all that they can to preserve their credibility with investors and with Elon Musk as Chairman, it's likely that management will succeed.

Investor takeaway
SolarCity's growth is still strong. While the market sold off on the first quarter guidance number, SolarCity's 2016 guidance hasn't changed. The company still expects to install 1.25 GW this year, which implies 40% annual growth. The extension of the ITC tax credit will increase demand. If Wall Street falls back in love with Elon Musk, SolarCity shares will tick up a bit too. Meanwhile, management expects to have positive cash generation by fourth quarter 2016.

While SolarCity needs to lower its cost of capital so that it can generate more value for its portfolio, the company doesn't have a liquidity problem like SunEdison does. SolarCity's finances will become better and the company won't repeat SunEdison's mistakes.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$681.79 (1.24%) $8.37
SunEdison, Inc. Stock Quote
SunEdison, Inc.
SUNEQ
SolarCity Corporation Stock Quote
SolarCity Corporation
SCTY.DL
Vivint Solar, Inc. Stock Quote
Vivint Solar, Inc.
VSLR

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