SolarCity Corporation

Transcription

1 : 2/07/2014 Sector: Technology SolarCity Corporation Ticker: SCTY Current Price: $78.50 Recommendation: Outperform Implied Price: $94.78 Key Statistics 52 Week Price Range 50-Day Moving Average $ $14.70 $64.72 Estimated Beta Dividend Yield N/A Market Capitalization $5,844,138,080 Short Interest 37.40% Trading Statistics Diluted Shares Outstanding 83,144,000 Average Volume (3-Month) 4,779,280 Institutional Ownership 7.60% Insider Ownership 73.30% EV/EBITDA (LTM) (73.77) Margins and Ratios Gross Margin (LTM) 60.03% EBITDA Margin (LTM) % $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 Investment Thesis Financing efforts will fuel the demand for installations and increase the rate of market penetration Acquisitions of Zep and Paramount will provide for more effective sales and marketing, and result in a faster rate of installation Business shift towards long-term lease agreements will provide for stable and predictable cash flows As chairman of the board, Elon Musk represents an important and wellaccredited face to the organization One-Year Stock Chart Net Margin (LTM) % Debt to Enterprise Value 2.93% $0.00 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec Day Avg 200-Day Avg 0 Covering Analyst: Scott Meyers swmeyers2@comcast.net 1 University of Oregon Investment Group

2 Business Overview 2012 Revenue Breakdown SolarCity Corporation was founded in 2006 and completed its initial public offering on December 13 th, The firm engages in the design, installation, and sale or lease of solar energy systems in the United States. SolarCity s customer base includes residential, commercial, and governmental entities who seek to incorporate renewable energy at prices below typical utility rates. SolarCity currently operates in 14 states, serving more than 50,000 customers, with future plans to expand internationally. The firm s competitive strengths reside in the nature of its business model. The company does not manufacture solar cells, but acquires them from different suppliers such as Yingli Solar. This hedges the risks associated with rising silicon prices, which are of primary concern for firms in this industry, and one which SolarCity s competitors are particularly exposed to. In addition, while the sale of solar energy systems have historically represented the largest percentage of total revenue, the firm has shifted its business model to focus on the sale of leases to its customers, which is forecasted to eventually represent the largest percent of total revenue. Through its lease agreements, customers are charged a monthly fee which is priced well below their current monthly utility rates. This method of price undercutting has allowed SolarCity to achieve a high market penetration rate, particularly because the consumer is not required to cover upfront installation costs, which allows them to switch over easily. In addition, the other primary competitive strength of SolarCity s business model lies in the length of the contract. Customers who sign the lease agreement are locked in for 20 years. These long-term purchase agreements create high-quality recurring customer payments, and reduce the volatility of top-line performance year over year. Overall, SolarCity s business model provides energy efficiency with minimal upfront costs, at significantly lower monthly rates, and locks in the revenue for 20+ years. The firm is achieving a high rate of market penetration, without any opportunity of giving back market share over the long-run. SolarCity s total residential market share increased 14.2% from 2012 to Total current cash payments under contract that are to be received going forward are in excess of $1.7 billion. This figure not only provides predictable cash inflows going forward, but will also only increase as more customers are locked in under contract. The firm expects to achieve the one million customer target by 2018, which implies a compounded annual growth rate of 73% from Strategic Positioning As previously mentioned, SolarCity is positioned well in relation to its competitors because it does not manufacture solar cells, but instead acquires them from outside suppliers in order to hedge the risk of increasing silicon cell prices. SolarCity benefits from the same forces that wiped out many other solar companies. The company does manufacture solar cells, and so it does not face strong competition from inexpensive solar panels from China. Instead, the company purchases the inexpensive solar panels and benefits from the lower prices. SolarCity purchases from multiple vendors such as Yingli Energy, Trina Solar, BenQ Corporation, and Suniva Inc., to ensure competitive pricing. UOIG 2

3 Megawatts Employed by State 1063 The firm s risk premium has been compressing even as the risk free rate rises. This compression is the result of long-term contracts which offer a high visibility of cash flow payments to receive down the road. Also, the firm s lease agreements include price escalation clauses, which hedges against inflation. The third primary component which helps to lower SolarCity s cost of capital is the high credit rating of SolarCity s customers. Default rates for its energy payments are historically lower than both residential mortgages and auto loans. Integrated Approach SolarCity is the only distributed energy company that offers integrated sales, financing, engineering, installation, monitoring, and efficiency services to its customers, without involving the services of multiple third-party participants. SolarCity provides a streamlined financing and installation process for little to no up-front costs. Lease fees may be incurred on a fixed monthly rate, or adjusted based upon the amount of energy produced. This allows greater flexibility for the firm s customers, and is another sales point encouraging them to switch to better energy. SolarCity also provides monitoring and maintenance through its robust technology platform, which ensures maximum energy usage and control. Overall the effect of dealing with a single company results in a better experience for the customer and a higher probability that they will renew the contract upon the end of the 20 year lease agreement. Business Growth Strategies PG&E Partnership U.S. Residential Solar Market Share SolarCity has been experiencing a high rate of growth over the last several years. From 2012 to 2013 alone, the firm increased its residential market share from 12% to 26.2%, and only expects this number to continue to increase. The focal point behind such a rapid expansion rate has been SolarCity s emphasis on capital expenditures and other financing activities to install systems around the country as quickly as possible. The firm has been continuously losing money in an attempt to minimize consumer switching costs, and lock in those consumers for 20+ years. In 2010, Pacific Gas and Electricity announced that it will provide $60 million in tax equity financing for over 1,000 solar systems to be installed by SolarCity. The partnership has been one of the primary contributors to SolarCity s growth over the past three years, as it has been able to roll-out solar systems quickly, which it would not have been able to finance alone. SolarCity has also received various other financing such as $440 million from U.S. Bankcorp. However, the partnership with PG&E is significant to SolarCity s future growth prospects because it provides insight into the perspective that major utility corporations are taking about the future of energy. Particularly firms such as SolarCity who are taking aggressive measures to expand quickly, we can expect to see further financing from utility firms who are trying to sustain profits in a rapidly evolving industry. Asset Securitization November of 2013 SolarCity completed the market s first sale of notes backed by the rooftop solar systems it has installed across the country. While the firm has traditionally financed its expansion from financial institutions or standard utility corporations, this represents the first instance in the solar industry of a UOIG 3

4 company financing growth through asset securitization. The securitization plays a similar role to the firm s growth prospects as previous capital-raising efforts in that the firm alone cannot fund the demand for installations, and must therefore look elsewhere. However, the securitization is important in that it represents the first avenue of solar finance in the market, which will open the gates for further instances to come. SolarCity is expected to make another offering next year, which could be in the $100 to $200 million range. In addition, the securitization also speaks volumes to the general solar market sentiment. Acquisitions In August of 2013, SolarCity acquired Paramount Solar, one of the leading solar sales and marketing firms. Paramount Solar signs up customers and then refers them to solar retail service providers such as SolarCity for the installation work. The acquisition improves SolarCity s remote selling capability and reduces the costs of acquiring new customers at the lowest possible rate. Acquisition Value Zep Inc. $158 Million Paramount Solar $120 Million In December of 2013, SolarCity announced that it will acquire Zep Solar, Inc. Zep Inc., is one of SolarCity s largest suppliers of rooftop equipment, and holds patents for many of the rooftop designs. The acquisition will have a significant effect on SolarCity s market penetration rate and operating costs. Prior to the acquisition, typical rooftop installation averaged 2-3 days. With Zep s processes and equipment, installations will be completed in a single day. Industry Overview SolarCity competes primarily within the solar power industry. This industry encompasses businesses whose primary activities involve the manufacturing, design, and installation of solar powered systems in the residential, commercial, and governmental segments. The industry is mostly fragmented, but is expected to consolidate in the next five years to Demand for solar products is driven by a variety of factors. The depletion of standard utilities such as gas and electrical energy, and subsequently the increase of these utility prices is one of the primary drivers of solar energy demand. In addition, government legislation will often provide a favorable tax rate to solar power generation firms, which allows these firms to price-undercut the standard utility companies. Also, the general public sentiment towards sustainable energy has been a strong demand factor in recent years. Sustainable energy infrastructure has encouraged consumers and businesses to demand and lobby for renewable energy. Due to the immaturity of the industry, a majority of the firms are continuing to expand operations both domestically and globally, resulting in higher overall capital expenditures, and lower margins. It is a very capital intensive industry. As explained, there are substantial capital investments to enter the market and to grow within the market. For each dollar spent on wages, solar power generators are expected to spend about $2.19 on capital instruments. UOIG 4

5 Macro factors One of the main macro issues that have affected solar companies particularly in the United States has been the importation of inexpensive Chinese solar panels. China supplied nearly half of the world s solar panels last year, up from onefifth in While the United States government has been implementing antidumping tariffs on Chinese-made solar cells, the measures have not had a significant impact on prices, as the Chinese companies have been able to uses solar cells from other countries in their panels. Competition SolarCity s primary competitors are the traditional utilities that supply energy to customers in the United States. Competition is based mainly on price and the ease at which consumers can switch to solar energy. In addition, SolarCity also competes with companies involved in different sections of its solar supply chain. For example, in the installation market, SolarCity competes with companies such as Real Goods Solar and American Solar Electric. In the solar project financing market, SolarCity competes with competitors such as SunRun Inc. SolarCity s competitive advantage over these companies was discussed earlier under strategic positioning; the company is able to offer its customers a vertically integrated platform involving design, installation, financing, and monitoring, to ensure the greatest possible customer experience. Management and Employee Relations Elon Musk Chairman Total U.S. Megawatt Installations Elon Musk is the current chairman and principal shareholder of SolarCity. Mr. Musk has a unique ability to create highly successful companies, as demonstrated by his position as CEO of SpaceX and Tesla Motors. While he does not hold a position in management, his visions and guidance are sure to be materialized within the company, and represent a positive factor to consider. Lyndon Rive Co-Founder and Chief Executive Officer Mr. Rive has been chief executive officer for SolarCity since it was founded in He has helped the company become one of the most recognizable brands in clean energy in six years. Mr. Lyndon is a lifelong entrepreneur who founded his first company at age 17. Peter Rive Co-Founder and Chief Operations Officer Mr. Rive oversees the company s operations and technology development. Peter has held several senior technology positions throughout his career focused on streamlining operational activities through the use of advanced software. Management Guidance SolarCity has been publicly traded for a little over a year, and therefore has not provided a large enough sample size to confidently assess the validity of management s guidance in general. However, management typically provides estimates for figures such as megawatt deployment, customer contracts, and expectations of the materialization of current activities. UOIG 5

6 Thus far management has demonstrated the ability to follow through on their guidance. For FY2013, management had initially forecasted that SolarCity would deploy close to 250 incremental megawatts for the year. By its third quarter, management adjusted their guidance upward to 275+ megawatts. Recent News Incremental Megawatts Deployed SolarCity Next Bond Offering May Reach $200 Million: CFO -Bloomberg 11/21/2013 In November SolarCity became the first U.S. company to offer bonds backed by rooftop solar panels. CFO Bob Kelly stated that the company plans to sell as much as $200 million of additional notes. SolarCity Expects 2014 Installations to Rise Almost 90% -Bloomberg 10/11/2013 SolarCity expects to boost its annual installed capacity almost 90 percent next year. Installed capacity is one of SolarCity s primary metrics for assessing market share and performance. The forecasting for 2014 speaks to the efforts of market penetration materializing. California Bill Would Expand Solar, Add Monthly Power Fee -Bloomberg 09/12/2013 California lawmakers sent legislation to the governor that would authorize a $10 monthly fee on power bills, and expand a program requiring utilities to buy excess solar electricity from customers. The bill is beneficial to SolarCity because it removes a ceiling, and allows for increased revenues. Total Cash Payments Under Contract (Billion) Catalysts Upside Financing efforts will fuel the demand for installations and increase the rate of market penetration Acquisitions of Zep and Paramount will provide for more effective sales and marketing, and result in a faster rate of installation Business shift towards long-term lease agreements will provide for stable and predictable cash flows As chairman of the board, Elon Musk represents an important and wellaccredited face to the organization Downside Changes to electric utility regulations may present technical and economic barriers to the purchase of solar energy systems A material drop in traditional utility rates would have a significant effect on performance The elimination of tax credits and other financial incentives would adversely impact business UOIG 6

7 Retained Value per Watt Retained Value per Watt Retained Value per Watt SG&A University of Oregon Investment Group Retained Value Analysis Overview Implied Price Incremental Megawatts 95 1,100 1,200 1,300 1,400 1,500 $ 210 $ $ $ $ $ $ 310 $ $ $ $ $ $ 410 $ $ $ $ $ $ 510 $ $ $ $ $ $ 610 $ $ $ $ $ Implied Price Incremental Megawatts 95 1,100 1,200 1,300 1,400 1,500 $ 1.30 $ $ $ $ $ $ 1.40 $ $ $ $ $ $ 1.50 $ $ $ $ $ $ 1.60 $ $ $ $ $ $ 1.70 $ $ $ $ $ In the absence of sustainably positive earnings under SolarCity s existing business model, the company can be valued using a retained value approach. Retained value analysis is unique to SolarCity s business model, which incorporates locked in contracts with long-term, consistent cash flows. Retained value is ultimately the present value of these 20+ year cash flows under contract. The retained value is essentially the value that SolarCity believes it can generate from each installation. SolarCity itself discounts the cash flows under contract to arrive at the retained value. It should be noted that in calculating the retained value for each period, SolarCity has also made the assumption of consumer renewal following the end of the 20 year contract, and this assumption accounts for about half of the given retained value. In addition, the firm uses a 6% discount rate, which is not the current cost of capital, but ascribes credit for future reductions as the market s risk perception of solar leases eventually converges with traditional consumer loans. The retained value model operates as a variation of the DCF. The primary variables are volume (incremental MW s deployed) multiplied by margin (retained value/watt), subtracting the costs of installation (SG&A), and then discounted back to arrive at a retained value. The framework utilizes the incremental retained value per watt as a metric for value creation. The valuation is highly sensitive to the assumption of these three input variables. Undervalued/(Overvalued) Implied Price $ % -7.7% 8.6% 24.9% 41.2% $ % -3.3% 14.7% 32.6% 50.6% $ % 1.1% 20.7% 40.3% 59.9% $ % 5.5% 26.8% 48.1% 69.3% $ % 10.0% 32.9% 55.8% 78.7% $ 1.30 $ $ $ $ $ $ 1.40 $ $ $ $ $ $ 1.50 $ $ $ $ $ $ 1.60 $ $ $ $ $ $ 1.70 $ $ $ $ $ Incremental Megawatts Deployed Incremental megawatts deployed are forecasted to sustain strong growth as the firm benefits from its recent acquisitions, which significantly expand its distribution channels, and rapidly increases the installation rate. The deployment rate is trended down into the terminal year to demonstrate more sustainable growth. Retained Value per Watt Retained value per watt is the metric for value creation. This metric is the value the company retains per installation, and is multiplied by incremental megawatts deployed to solve for the incremental value retained. Retained value per watt is forecasted to continue to increase as the firm enjoys decreased installation costs, the effects of securitization, and a revenue mix shift towards higher-margin residential leases. However, in 2017 the firm s investment tax credit is reduced from 30% to 10%, which is illustrated by the decrease in retained value per watt to $1.50. UOIG 7

8 WACC WACC SG&A University of Oregon Investment Group Sales General & Administrative Implied Price $ 210 $ $ $ $ $ $ 310 $ $ $ $ $ $ 410 $ $ $ $ $ $ 510 $ $ $ $ $ $ 610 $ $ $ $ $ This item in the retained value analysis reflects the overall cost structure associated with the installations. SG&A was projected to trend down overtime as a percent of revenue. The rate of decrease is primarily attributed to the acquisition of Paramount Solar s effective sales and marketing channels, and Zep s installation technologies. In addition, once SolarCity becomes well-established and the rate of installations decreases, SG&A will decrease accordingly. Weighted Average Cost of Capital The weighted average cost of capital is kept at SolarCity s own 6% rate, which it uses when discounting to arrive at retained value. As noted above, this is not the current cost of capital, but reflects future compression associated with a convergence towards consumer loans. Undervalued/(Overvalued) Implied Price 21% % -12.5% 7.1% 26.7% 46.3% 65.9% 5% -15.6% 4.0% 23.6% 43.2% 62.8% 6% -18.5% 1.1% 20.7% 40.3% 59.9% 7% -21.2% -1.6% 18.0% 37.6% 57.2% 8% -23.7% -4.1% 15.5% 35.1% 54.7% x % $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ % $ $ $ $ $ While the group normally applies a 3% terminal growth rate into perpetuity, I believe that a 3x exit multiple is more accurate for the retained value model, which was applied to the terminal retained value and then discounted back using the 6% WACC. Revenue Model Total revenue was projected using two models. The first model was projected utilizing one of management s primary metrics to assess performance, megawatts deployed. Dividing each period s total revenue by the incremental megawatts deployed for that period resulted in a revenue/incremental megawatt deployed metric. Averaging this metric for each respective period up until Q42013, resulted in overall average revenue/incremental megawatt deployed of $623,000/megawatt. From here, total revenue was projected for each period going forward by multiplying the average $/megawatt by each period s incremental megawatts deployed to arrive at a value. For 2014, management expected additional megawatts to be deployed, which is reflected in the model. It should also be noted that cumulative megawatts deployed played no part in the modeling, but was included to provide additional information. The second model was projected based upon each of SolarCity s business segments. The firm has shifted its business focus going forward to emphasize operating lease revenue. This trend is reflected in the model as it eventually reaches over 70% of total revenue by the terminal year. Total revenue was calculated utilizing a 50%-50% weighting of each model UOIG 8

9 Retained Value Assumptions Weighted Average Cost of Capital 6.00% Terminal Year Retained Value $1,539 Terminal Value $4,617 Discounted Terminal Value 3,071 Sum of PV Retained Value 5,160 Firm Value 9,777 Total Debt 299 Market Capitalization 9,478 Fully Diluted Shares 100 Implied Price $ Current Price $ Undervalued 20.74% 3x Recommendation I recommend an outperform for all portfolios. SolarCity is a unique corporation which operates a revolutionary business model in the industry. The firm has achieved a substantial first mover advantage in the market, and has locked in that market share for the next 20+ years. Going forward, the recent acquisitions will increase the penetration rate and capture incremental market share. After modeling the company using a retained value analysis, I calculated an implied price of $94.78, which represents a 20.74% undervaluation from its current price of $ UOIG 9

10 Appendix 1 Retained Value Analysis Discounted Cash Flow Analysis Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($ in Millions) 2012A 03/31/2013A 06/30/2013A 09/30/2013A 12/31/2013E 2013E 03/31/2014E 06/30/2014E 09/30/2014E 12/31/2014E 2014E 2015E 2016E 2017E 2018E Incremental Megawatts Deployed % Growth 12.20% 70.97% % % % % 73.08% 8.91% 70.86% 47.37% 35.71% 21.05% 13.04% Retained Value/Watt $1.18 $1.25 $1.27 $1.37 $1.51 $1.51 $1.55 $1.61 $1.66 $1.71 $1.75 $1.80 $1.85 $1.50 $1.50 % Growth 5.93% 1.60% 7.87% 10.22% 10.22% 2.65% 3.87% 3.11% 3.01% 2.34% 2.86% 2.78% (18.92%) 0.00% Sales General and Administrative $ $34.49 $42.52 $46.20 $65.99 $ $47.67 $66.83 $76.92 $60.33 $ $ $ $ $ % Growth 58.01% 33.06% 12.22% 14.09% 11.26% 14.59% Incremental Retained Value $ $23.01 $24.79 $60.66 $86.52 $ $ $ $ $ $ $ $1, $1, $1, Discounted Retained Value $22.68 $24.08 $58.07 $81.62 $ $ $ $ $ $ $ $1, $ $1, Period Appendix 2 Revenue Model Revenue Model Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($ in Thousands) 2010A 2011A 2012A 03/31/2013A 06/30/2013A 09/30/2013A 12/31/2013E 2013E 03/31/2014E 06/30/2014E 09/30/2014E 12/31/2014E 2014E 2015E 2016E 2017E 2018E Megawatt Model Incremental Megawatts Deployed % Growth % % 12.20% 70.97% % 75.95% % % 73.08% 8.91% 70.86% 47.37% 35.71% 21.05% 13.04% Cumulative Megawatts Deployed % Growth 87.09% % % 16.03% 15.92% 20.21% 21.77% 96.86% 18.58% 18.66% 16.98% 11.83% 84.07% 67.31% 54.60% 42.75% 33.85% Total Revenue $ 32,428 $ 59,551 $ 128,662 $ 29,988 $ 37,949 $ 48,600 $ 62,923 $ 179,460 $ 65,415 $ 77,875 $ 84,105 $ 68,530 $ 295,925 $ 436,100 $ 591,850 $ 716,450 $ 809,900 % Growth 83.64% % 20.72% (18.51%) 51.99% 39.48% % % 73.06% 8.91% 64.90% 47.37% 35.71% 21.05% 13.04% Product Model Operating Leases $ 9,684 $ 23,145 $ 47,616 $ 15,089 $ 20,608 $ 24,796 $ 38,434 $ 98,927 $ 25,476 $ 43,461 $ 47,063 $ 42,754 $ 158,283 $ 261,167 $ 391,750 $ 548,450 $ 712,985 % Growth % % 85.39% 78.76% 78.17% 55.00% % 68.84% % 89.80% 11.24% 60.00% 65% 50% 40% 30% % of Total Revenue 29.86% 38.87% 37.01% 50.32% 54.30% 51.02% 53.56% 52.54% 54.49% 58.71% 54.20% 59.55% 56.75% 63.39% 67.51% 69.95% 71.60% Solar Energy Systems $ 22,744 $ 36,406 $ 81,046 $ 14,899 $ 17,341 $ 23,804 $ 33,326 $ 89,370 $ 21,274 $ 30,564 $ 39,775 $ 29,036 $ 120,649 $ 150,811 $ 188,514 $ 235,643 $ 282,771 % Growth 60.07% % (10.80%) (50.52%) 31.82% 40.00% 10.27% 42.79% 76.25% 67.09% (12.87%) 35.00% 25% 25% 25% 20% % of Total Revenue 70.14% 61.13% 62.99% 49.68% 45.70% 48.98% 46.44% 47.46% 45.51% 41.29% 45.80% 40.45% 43.25% 36.61% 32.49% 30.05% 28.40% Total Revenue $ 32,428 $ 59,551 $ 128,662 $ 29,988 $ 37,949 $ 48,600 $ 71,759 $ 188,296 $ 46,750 $ 74,025 $ 86,838 $ 71,790 $ 278,932 $ 411,978 $ 580,264 $ 784,093 $ 995,756 % Growth 83.64% % 20.72% (18.51%) 51.99% 46.35% 55.90% 95.06% 78.68%.04% 48.13% 47.70% 40.85% 35.13% 26.99% Weighted Total Megawatt Model Weight: 50% $ 16,214 $ 29,776 $ 64,331 $ 14,994 $ 18,975 $ 24,300 $ 31,462 $ 89,730 $ 32,708 $ 38,938 $ 42,053 $ 34,265 $ 147,963 $ 218,050 $ 295,925 $ 358,225 $ 404,950 Product Model Weight: 50% $ 16,214 $ 29,776 $ 64,331 $ 14,994 $ 18,975 $ 24,300 $ 35,880 $ 94,148 $ 23,375 $ 37,013 $ 43,419 $ 35,895 $ 139,466 $ 205,989 $ 290,132 $ 392,046 $ 497,878 Total Revenue $ 32,428 $ 59,551 $ 128,662 $ 29,988 $ 37,949 $ 48,600 $ 67,341 $ 183,878 $ 56,083 $ 75,950 $ 85,472 $ 70,160 $ 287,428 $ 424,039 $ 586,057 $ 750,271 $ 902,828 % Growth 83.64% % 20.72% (18.51%) 51.99% 42.92% 87.02% % 75.87% 4.19% 56.31% 47.53% 38.21% 28.02% 20.33% UOIG 10

11 Appendix 3 Sources Yahoo! Finance Bloomberg Factset Morningstar Forbes SCTY Investor Relations SolarBuzz IBISWorld Hoover s Analytics SEC Filings UOIG 11