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Why SolarCity Will Explode. Why SolarCity Will Collapse.



SolarCity is the top U.S. residential solar installer. The company has announced numerous recent new partnerships that have grown its reach into Texas, Pennsylvania, Texas, New Mexico and New Hampshire. Further, SCTY has exsiting partnerships with DIRECTTV Nest Labs (a thermostat maker). The Motley Fool reported that SCTY also launched its power storage program with partner Tesla Motors, making it available in all of SolarCity's current markets. With further expansion into California and Nevada, the growth story is compelling.

However, the fundamentals as of right now are quite poor and the stock price drop of 17% in the last year is evidence of that. The mode of operation for the company has been to invest huge amounts into capital expenditures (we'll see that in a chart, below) to build a customer base (that part is working) and then let that expense turn into two-decades of revenue streams from the leased solar systems. But, remember, fundamentals and stock price don't have a correlation, they have a causation. The companies with the largest market caps have the largest free cash flow and earnings. Period.

SCTY's revenue (TTM) has risen for seven consecutive quarters, each time hitting a new all-time high.

The average estimate for next quarter's revenue of $90.7 million is above last quarter's $67.5 million.

Technicals   |   Support: 55.175   |   Resistance: 58.1   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

SCTY has a two bull (low rated) technical rating because it's trading below both its 10-day (short-term) and its 50-day (medium-term) moving averages. We do note that the stock is trading above the long-term 200-day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-06 $-1.62 $90.7 M $90.0 M $67.5 M Provided by ZACKS

Let's look at the core elements that drive the SCTY's poor fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 259 197 132

Operating Margin (QTR) 0.349 0.49 0.53 FALLING

Net Income (TTM US$ Millions) -53 -39 -143 FALLING

Levered Free Cash Flow (TTM US$ Millions) -1,340 -793 -445

Capital Expenditures (TTM US$ Millions) 1,319 785 475

Stock Returns and Chart

SCTY is up +9.4% over the last three months and down -0.8% over the last six months. The stock has returned -17.2% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 259197132

There is some "good" with SCTY. Revenue (TTM) has increased for at least five consecutive quarters (seven in this case) which triggers a "trend." Note that SCTY has grown revenue by 31% year-over-year and 96% in two-years. Those are huge numbers. Any number over 20% year-over-year has an added impact on the fundamental (star) rating.

What do all these numbers mean?
SCTY's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 0.3490.490.53FALLING

The single most disturbing part of SCTY's fundamentals is the trend in operating margins. This ratio (which simply represents how much revenue is generated per one dollar of expense) must be at a minimum above 1.0 in order for a company to turn an operating profit. For the latest quarter SCTY showed a ratio of 0.35. That's crazy low, and in English means that the company generates $0.35 of revenue for every dollar of expense.

Even more disturbing is the trend, which has dropped for four consecutive quarters and now sits at an all-time low. The best the company has ever reported is $0.75 (quarter ending July 2012), which is quite low in and of itself, but again, $0.35 is basically unheard of. Growing revenue at $0.35 to the dollar of cost is hardly a business model that can be sustained. But remember, the mode of operation is HUGE costs now, and cash flow for decades to follow.

What do all these numbers mean?
One year ago Operating Revenues/Operating Expense was 0.49. In the last year we can see operating margins are decreasing and less than 1.0 for the most recent quarter (below the critical level).

SCTY's fundamental rating was affected from the operating margin numbers in the following ways:
1. The current value is below the critical 1.0 level (the firm generates an operating loss).
2. The one-year change was negative (lowers the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) -53-39-143FALLING

Obviously, if a company spends $1 to generate $0.35 of revenue, earnings are going to be negative. Net Income (after tax profit) over the trailing twelve months (TTM) for SCTY is falling. For the most recent trailing-twelve-months (TTM) the company reported net income of -$53 (million). Now, before we scream bloody murder, that number isn't "that bad." So far the firm has actually done a reasonable job of not totally destroying itself with unmanageable losses. But wait until we look at free cash flow.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.

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Levered Free Cash Flow (TTM US$ Millions) -1,340-793-445

Levered Free Cash Flow (FCF) (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For SCTY the metric is trending down and has seen new all-time lows for eight consecutive quarters. The most recent trailing-twelve-months show a FCF (TTM) number of negative $1.34 billion. That is a HUGE negative free cash flow and it may be tumbling totally out of control.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note that nasty trend.

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Capital Expenditures (TTM US$ Millions) 1,319785475

So at this point one could wonder, "why is this stock not trading at zero?" There's actually very good reason.

Capital Expenditures (CapEx) (TTM US$ Millions) is trending higher meaning that for at least five consecutive quarters (in this case thirteen), it's been rising. CapEx in the most recent TTM for SCTY was $1.32 billion. That $1.32 billion is essentially exactly the level of negative free cash flow (-$1.34 billion). So we can see explicitly, that SCTY is spending on CapEx at a huge rate and it's that phenomenon that is driving negative FCF, and nothing else.

CapEx is up 68% from last year's value of $785 million and 178% from two-years ago.

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars.

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The bullish thesis for SCTY is simple. The company is growing revenue at massive scale, expanding partnerships both domestically and internationally. It is the largest solar installer in the US and has a business model that is based on huge CapEx now, for steady and reliable cash flow for decades to follow. That's reasonable. That's actually pretty bullish.

The bearish thesis for SCTY is also rather simple. The company is generating massive free cash flow losses that are exactly equal to CapEx in an industry that has a ton of competition from national to regional to local players. Betting on lease payments to stand up for 20+ years is dangerous, risky and possibly a death nail.

Now you decide. Is SolarCity a winner or a loser?