Roth Capital Affirms SolarCity (SCTY) at 'Buy'; Comments on Recent Meetings with Management

Roth Capital reiterates its Buy rating and $98 pirce target on SolarCity (Nasdq: SCTY) following recent meetings with amanagement.

Analyst Philip Shen said: It appears lower NPV/W surprised the market ... Following its recent deal roadshow, SCTY released a new investor presentation that appears to have caught the market by surprise. NPV/W for a typical 6.4kW system is now $1.75 down 20% vs. prior of $2.19. We believe the 44c/W difference can be explained by three factors: (1) Establishment of fixed CA pricing of ~15c/kWh vs. prior of ~17c/kWh; (2) Using the actual blended escalator of 2.0% vs. prior of 2.9%%; and (3) Lowering of FMV from ~$5.50 to $4.75/W. While some erosion of NPV/W was to be expected after the company discussed fixed pricing on its Q2 earnings call, NPV/W serves as a proxy for RV/W, and its reduction appears to have caused investor concern. In its history, the company has made few pricing changes. After rolling out fixed pricing in other states, we would not expect many—if any—pricing changes over the near to medium term.

we believe fixed pricing results in a greater addressable market and lower customer acquisition costs (CAC). With deployment targets of 525MW in 2014 and 950MW in 2015, one might cynically view the establishment of lower pricing as a move to meet its guidance. We do not believe this is the case as the overall market is robust, in our view, and the company has made steady strides in gaining market share. The fixed pricing move, in our view, represents a strategic shift in philosophy—one that simplifies and improves the customer experience by de-emphasizeing negotiations as well as increases its addressable market, while lowering CAC.

SCTY’s business in 2017, following the ITC step-down, looks attractive. In the same presentation that introduced a lower NPV/W, the company shared 2017 system economics for the first time (SCTY Sept 2014 investor presentation pg. 19) and they appear attractive. Using an assumption of 60c/W of SG&A (vs. 74c/W in Q2), we believe SCTY could drive $1/W of NPV or retained value in a normalized subsidy environment. Assuming the company posted a hypothetical 2GW of deployments (vs. 1.8GW in our conservative model), this could represent $2bn of retained value.

For an analyst ratings summary and ratings history on SolarCity click here. For more ratings news on SolarCity click here.

SolarCity closed at $59.00 yesterday.

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