SolarCity: Buy The Slump for Long-Term Gains

SolarCity (SCTY) shares have been on a roller coaster ride this year. But, despite substantial top and bottom line growth, the company's stock has lost over 23% of its value in the past three months and currently trades close to its 52-week low. But, in my opinion, this is an opportunity for investors to buy more shares. Let's see why.

Strong bookings growth and lower costs are tailwinds

Last quarter, SolarCity booked nearly 237 megawatts and installed approximately 189 megawatts, achieving about 77% year-over-year growth.

The company plans to install nearly 260 megawatts in the third quarter, which will translate into an outstanding growth of 90% year-over-year. Moreover, SolarCity has successfully controlled its overall installation costs to $2.91 a watt, and strategically created $196 million of monetary value.

Specifically, the company implemented 21 megawatts of commercial systems and 168 megawatts of residential systems. Its housing installations expanded 86% on a year-over-year basis. SolarCity has strategically enhanced its commercial growth by lowering its commercial installation cost, coupled with superior sales execution, allowing the company to book megawatt growth in the second quarter.

Moreover, SolarCity will witness a sharp decline in inverter prices and panel prices over the coming few quarters. This decline in prices, coupled with the impact of the company in-sourcing its commercial projects, will enable it to successfully cover the pricing gap between the present price of $2.13 and the targeted operational cost of $1.90.

Targeting growth areas

SolarCity is targeting small and medium commercial markets that have significant growth potential. Considering the key fact that such installations on a small scale are very expensive, the power company is able to drive down costs by executing the installation work itself and by employing an innovative commercial mounting hardware system called the ZS Peak.

The low cost structure of SolarCity, in addition to a lease program introduced to the Property Assess Clean Energy (PACE) program, has allowed the power company to offer lucrative financing options to its small businesses. Also, in order to improve its financial capacity, SolarCity has launched a new fund.

During the second quarter, SolarCity introduced a new fund, upgraded one of its present funds, and concluded the quarter with approximately 447 megawatts of un-deployed power. Going forward, SolarCity expects to close extra funds with new and currently active investors by the end of next year with a focused approach towards selling up its 2016 requirements.

Analyst sentiment is positive

Credit Suisse rates SolarCity as Outperform, and had increased its annual price forecast to $105 from $99, primarily driven by the company's superior second quarter results. In fact, SolarCity had exceeded its production volume guidance for the quarter and registered 189 megawatts (MW) of installations, surpassing the consensus forecast. Further, SolarCity's bookings of 395 MW were up 67% quarter-over-quarter and 81% year-over-year development.

On the other hand, Morgan Stanley analyst Stephen C Byrd has maintained an Equal-weight rating on SolarCity with a price target of $93, primarily driven by several of the company's key growth initiatives including, superior cost control and growing ABS proceeds, which are believed to somewhat offset the loss of tax equity. The power company's global expansion efforts will also prove fruitful, along with its strategic partnership with Tesla Motors.

The common thing about both these analyst ratings is that their price targets are way higher than SolarCity's current market price of around $47. Thus, a lot of upside is expected in SolarCity's market price going forward, which is not surprising given the company's end-market potential.

Conclusion

All in all, SolarCity's drop in the past three months presents a buying opportunity for investors. The company has recorded strong bookings growth of late, and it is making moves to expand its business further. Hence, in my opinion, investors should buy the drop in SolarCity's shares.

Published on Aug 21, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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