SolarCity (SCTY) Continues Making Demonstrated Material Progress; Roth Upgrades to 'Buy'

Roth Capital upgrades SolarCity (Nasdaq: SCTY) from Neutral to Buy with a $65 price target following the company's recent quarterly results.

Analyst Philip Shen noted that SolarCity continues to make material progress. Key points on the upgrade:

1. The company continues to surprise to the upside on deployments. Most recently, SCTY boosted its 2014 guidance to mp 525MW (implying +88% YoY growth) and unveiled an impressive 2015 outlook of mp 950MW (implying +81% YoY growth). For reference, after Q1’13, we had forecast 328MW in 2014 (vs. current ROTHe of 525MW) and 459MW in 2015 (vs. current ROTHe of 950MW), which highlights the magnitude of SCTY’s upside surprises to date.

2. SCTY is demonstrating operational excellence. On the bookings front, SCTY booked 136MW during Q1 at ~34c/W (assuming sales and marketing divided by bookings, $46.9mn/136MW). This approximation of customer acquisition efficiency is impressive when compared to the industry average, which we believe to be in the ~50c/W range. The company has driven down installation costs by ~30% since Q2’12. While our forecast does not assume aggressive cost reductions going forward (we assume an average all-in installed cost per watt decline of ~5%/year), we believe SCTY could boost asset yields further by lowering its installed costs more aggressively.

3. We see a large TAM and believe SCTY has demonstrated durable competitive leadership. Even with large, well-capitalized competitors encroaching on residential solar, we believe that the TAM is substantial enough to accommodate multiple large players. On its recent conference call, NRG Energy cited 2mn addressable households through 2015 alone. We believe SCTY’s cumulative guidance (mp 525MW in 2014 + mp 950MW in 2015) represents <230k homes (or just <12% of this entire market), which highlights the scale of the opportunity at hand. Additionally, we believe SCTY has a multi-year lead over new entrants that will have to rapidly get up to speed to steal share from SCTY.

4. SCTY has blazed a trail for others in DG solar on the financing front and we see continued leadership. The company has completed the industry’s first two ABS transactions at low costs of financing (ABS 2013-1 of 4.8% and ABS 2014-1 of 4.6%). We expect an additional crowd funding offering from SCTY’s Common Assets segment in the coming months. Additionally, we believe future ABS deals could further drive down financing costs as investors become more familiar with these relatively newer securitized assets.

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