SolarCity (SCTY) Stock: A Wake Up Call To Naysayers!

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SolarCity Corp (NASDAQ: SCTY)

SolarCity is a very interesting stock to follow at the moment. While there are plenty of people that see growth in the company’s future, there are also plenty of naysayers out there. Nonetheless, I believe that the bears on the stock are sorely mistaken. Today, we’ll talk about the argument the bears are making and why they are sorely mistaken.

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The Bearish Argument On SCTY

As mentioned above, SolarCity is a heavily debated stock, and, to be honest, I can understand the arguments on both sides of the fence. With that said, the bearish argument surrounds debt and is largely fueled by Sunedison. So, let’s start with a back story on Sunedison, shall we?

Sunedison is a solar power company that is focused on building solar power plants. When the power plants are built, the company turns around and signs power purchase agreements with utility companies to sell the power generated in an long-term agreement at a wholesale rate.

In order for Sunedison to grow, the company had to take out massive amounts of debt. At first, the debt was simply to cover the costs of solar power plants. However, later, the company went on an acquisition spree, spending billions and billions of dollars in the process. Of course, these billions came from loans.

After a while, all of the debt that Sunedison agreed to pay back caught up with the company. Unfortunately, it got to the point where the company simply couldn’t fulfill its obligations. As a result, it was forced to file bankruptcy.

This bankruptcy hit the heart of the solar industry, and SCTY simply wasn’t immune to the opinions that were generated as a result of it. Unfortunately, SolarCity has it’s own mass of debt. Consequently, the bears look at this debt and see the company falling down the same lines as Sunedison.

Why The Bears Are Sorely Mistaken

I can understand that, from the outside looking in, and with broad generalizations, SCTY can look like a bad investment with tons of similarities to Sunedison. However, when you look at the stock from a different perspective, you’ll see that the two stories are very different, and chances are that SCTY and its investors have nothing to worry about. Let’s break it down, shall we?

  • Business Model – SolarCity has a completely different business model. Instead of focusing on building solar power plants, the company is focused on bringing solar to consumers. That’s right – the company’s focus is on residential and commercial rooftop solar systems. This makes the business inherently different, right off of the bat. At the end of the day, views toward burning fossil fuels are changing. As the world moves to clean energy, consumers are likely to want control over their energy. This means that demand for SCTY products will only grow.
  • Debt – There’s no doubt that SCTY has debt. This debt was created because the average consumer doesn’t have the amount of money needed to install solar systems laying around. So, SolarCity made the decision to offer payment plans. To cover initial costs, they had to take out debt. However, the debts are a fraction of what Sunedison faced. Comparing the two would be like comparing cancer to the common cold.
  • Restructured Plans For The Future – SCTY realized that its debts were growing, and wanted to cut the bleeding; this is something we didn’t see from Sunedison. As a result, instead of taking out more debt, SolarCity has started to securitize blocks of solar projects. This allows the company the funding it needs to continue to offer payment plans while passing the risk down to the investors of these blocks. Ultimately, this takes the debt problem off of the table in the long run.

The Bottom Line

The bottom line is that bears do have valid arguments, that’s if you take a very generalized approach to analysis of a company. However, when we actually look into the details of SCTY, it becomes clear that all validity in the bearish argument is lost. While investor sentiment will likely hinder growth in the short run, this company is well positioned for long-run growth.

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What Do You Think?

Where do you think SCTY is headed moving forward? Join the discussion at TalkTRENDZ from CNA Finance!

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2 COMMENTS

  1. The bearish argument isn’t just about debt. It also about the massive penetration of much lower priced competitors that are entering the market. While the leasing and PPA companies are still charging consumers $0.12 to $0.16 per kilowatt hour. Competitors are coming in at just $0.07 cents per kWh.

  2. To me, SCTY has a very similar business model as car dealerships. SCTY is leasing their equipment. If dealerships took all of the debt on themselves when they sold and leased cars, they would have extremely high debt. Instead, they have finance companies which are essentially banks that make money financing depreciating equipment (cars). SCTY should spin off a separate financing company whose financials would be compared to other financial companies instead of having all of that debt on the books and being compared to other energy companies.

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