Why This New Solar Stock Could Put Musk's SolarCity to Shame

This soon-to-be publicly traded residential solar provider may have a one-up on the Musk darling's business model, but will that be enough?
By Tom Terrarosa ,

There's a new residential solar provider coming to market by the name of Sungevity, a longtime competitor to Elon Musk's SolarCity (SCTY) and Sunrun (RUN) - Get Report , and analysts wonder if this means the times truly are a changing.  

Sungevity plans to go public via a merger with a special purpose acquisition company, or SPAC, called Easterly Acquisition (EACQ) - Get Report , creating a $607 million market capitalization entity, which puts it squarely ahead of peers Sunrun and Vivant Solar (VSLR) - Get Report , but well behind solar behemoth SolarCity.

The company boasts that its business model is less cost-intensive than that of its competitors, however, as it outsources the installation and financing associated with its systems, perhaps implying it can better withstand the headwinds SolarCity has faced in the past year that have caused its stock to plummet to less than half its peak value.

Indeed, SolarCity has come under fire from investors and analysts who believe the company's business model is too cost-intensive to be supported by its revenue streams. And fears of potential interest hikes coming later this year from the Federal Reserve's Federal Open Market Committee, among other headwinds, have caused analysts, such as Barclays' Jon Windham and Daniel Ford, to pull back their support of the stock. 

And if you haven't been living under a rock, you've heard the news: Musk's Tesla plans to buy Musk's SolarCity for as much as $2.8 billion. So the point as to whether Sungevity's model will help it leave SolarCity in the dust, could be moot.

But if the market's abysmal reaction to the announcement of that merger is any indication, the deal is no sure thing, and leaves SolarCity far from untouchable. 

Unless it were to take on debt, Solar City can only hope to raise money via raising revenue or selling equity. 

Soalr City earns its revenus from the sale of solar projects outright, a very small portion of its business, or from residential solar leasing, which recognizes monthly principal and interest payments over a certain amount of years, according to analysts.. 

Given the cost to develop solar systems the company's historically rapid growth targets, analysts find it hard to miss why SolarCity's earnings per share have been in the red the past three quarters. 

Nevertheless, Axiom Capital's James Bardowski points out that revenues realized over 20 years less all expenses today (analysts have estimated $400 million in cash burn for SolarCity this year) equals enormous generally accepted accounting principles, or GAAP, losses today. 

SolarCity's cash flow statements reflect its financing numbers and relate to minority contributions and distributions from tax equity investors, i.e. investment banks that buy and leaseback the solar systems to SCTY, which, in turn, subleases the systems to homeowners.

This second method has been a mainstay for SolarCity's business model, according to Axiom's Bardowski, but the analyst said it's important to note the cash infusion from tax equity investors is already ear-marked for investment spending, and often on the very system that was sold to the investors.

"So, although SCTY is getting cash from minority investors, it's not making money," Bardowski said.

Take the financing out of the equation, and for good measure take the installation costs out as well as Sungevity reportedly outsources installation, and you have a model that in theory could allow this soon-to-be-public entity to thrive, Bardowski admits. 

Indeed, the California Solar Initiative, an entity that collects data on solar systems in the state, which is said to supply close to 50% of solar energy in the entire country, has noticed a trend developing where homeowners are more often opting to own their solar systems directly by either purchasing the panels outright or taking out a separate loan (not through the panel providers) to pay for them. 

But Bardowski, an admittedly bearish solar industry follower, said Sungevity would still face many of the same headwinds that have stunted the growth of solar companies worldwide, including the lack of advanced technology, the lack of government incentives, and plummeting prices as exponential levels of supply are coming on the market. 

"The fact is for solar to stand on its feet, we need technology 10 years from now, today," he said. "The crutch has been state subsidies, both federal and local states, and that merry-go-round will keep going until it becomes too expensive for the coffers of tax payers. So from a thousand feet up Sungevity looks interesting, but its tied to these same subsidies."

Nevertheless, company officials feel investors will find Sungevity's model "more appealing," the New York Times reported. With the deal expected to close before year's end, the truth to that could be determined before Tesla and SolarCity say their vows, if ever they do. 

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