Skip to main content

NEW YORK ( TheStreet) -- There's something happening with  SolarCity (SCTY) .

Shares of the stock has dropped by 7.6% over the past three months into the mid $50s. Yet, several leading analysts have begun to upgrade the company -- the consensus rating now leans towards a strong buy. 

The brightening forecast for SolarCity comes as shares of rival solar panel manufacturers First Solar (FSLR) - Get First Solar, Inc. Report and SunPower (SPWR) - Get SunPower Corporation Report  have also declined. Considering that current oil prices are at their lowest levels in years, what makes SolarCity so intriguing for analysts? Is this buy rating justified?

Probably not. SolarCity is facing challenges finding ways to boost profitability, changing utility rates structures and falling solar panels prices. These challenges call into question its business model. For now, the current high valuation and elevated debt burden are tilting the scale towards steering clear from this company at its current price.

At first glance, the company doesn't seem too impressive: It continues to lose money on a quarterly basis -- in the past quarter alone its operating loss was $74 million. Moreover, during the first nine months of the year its net earnings per share were 57 cents.

But one of the main reasons analysts like this company is its revenue growth: In the first three quarters, its net sales more than doubled compared to the same time frame last year.

Furthermore, the company continues to find ways to expand its operations: It recently joined with Bank of America Merrill Lynch to finance nearly $400 million in solar power projects for 2014-2015 and it extended its operations to western Massachusetts with a new operations center in Agawam.

Also, SolarCity entered an agreement with Wal-Mart Stores (WMT) - Get Walmart Inc. Report to install new solar projects at facilities in up to 36 states for the next four years. Such agreements are likely to further enable SolarCity to increase its net sales in the coming years.

TheStreet Recommends

But this company doesn't offer a whole lot more than a growing business with little to no profits. Also, there are other potential perils: Some analysts have also pointed out that a possible change in the rate structure of utility companies, as proposed by SRP, may raise the risk related to SolarCity's business model.

Another issue to consider is the ongoing drop in solar panel prices, which could lead, over time, leasing panels less attractive over owning. The company's debt levels are also high as its debt-to-equity ratio stands at 2 while back in 2013 this ratio was 1.18.

The recent fall in oil prices may have also provided another reason solar companies' stocks, including SolarCity, are down because solar energy became less favorable.

In terms of valuation, it's not possible to use profit-related measurements. So let's examine its enterprise value/revenue.

Currently, this measurement is 24.33. Other solar companies have much lower ratio: First Solar's ratio is 1.08, and SunPower's enterprise value/revenue is 1.35. This comparison is a bit misleading considering SolarCity, as oppose to First Solar or SunPower, is engaged in leasing solar panels.

Also, these measurements don't account for future growth. Even after considering these issues, such a gap in valuation is still hard to swallow.

TheStreet Ratings team rates SOLARCITY CORP as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate SOLARCITY CORP (SCTY) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow, generally high debt management risk and feeble growth in its earnings per share."

You can view the full analysis from the report here: SCTY Ratings Report

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.