SCTY Stock: Is SolarCity Corp the Next Sunedison Inc?

Grim Prospects for SCTY StockGrim Prospects for SCTY Stock

This may sound a little dramatic, but the fate of SolarCity Corp (NASDAQ:SCTY) is hanging on the edge. SCTY stock could literally make or break in the coming months depending on how the company handles three things.

Cheaper costs are certainly a tailwind for SolarCity, but the firm must find a way to safeguard its share price. Yes, its debt load is carefully balanced, but can SolarCity survive another rate hike from the Federal Reserve?

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In the past, I’ve mentioned that SolarCity operates more like a financial firm than a solar power provider. The company is basically a go-between for people with money (to invest in solar power) and people who want solar panels (without the upfront costs).

Customers can lease solar panels from SolarCity like they lease a car. But that means SolarCity has to balance its funding costs with the amount it charges for leases.

In recent quarters, the company has struck a really healthy balance. Minus the cost of actually getting the customer, the firm is cash-positive on each megawatt of solar power.

That being said, SolarCity really needs to make sure it doesn’t become the next Sunedison Inc. The story of SUNE stock is not one SolarCity wants to imitate.

I mean, here was a company several times the size of SolarCity, handling a wide set of projects around the world. It was a Wall Street darling, but less than a year after hitting its peak, the company filed for Chapter 11 bankruptcy protection.

How on earth did that happen?

There are many causes, but Sunedison’s $12.0 billion of debt was obviously the biggest problem. What you have to understand is that Sunedison would borrow money to build a solar project of some kind, then it would eventually sell the completed project to one of its subsidiary yieldcos. It was a strange and innovative way of financing new projects.

For a while, that drove SUNE stock through the roof. Wall Street loved it…that is, they loved the company until the attempted takeover of Vivint Solar Inc. That acquisition was a tipping point for Sunedison. The stock fell sharply out of favor.

Pretty soon, we started seeing headlines like, “Is SunEdison Caught in a Debt Trap?

I don’t want to see SolarCity go the same way as Sunedison. The company has an incredible vision for the future; it would be great for it to succeed. But if investors start to question the sustainability of its debt, SCTY stock could crash.

Some people would argue that’s already started to happen. The share price is down 62.95% from 12 months ago, partly because SolarCity’s long-term debt grew by $100 million. Rising interest rates could endanger those debts.

Moreover, investors are likely to give SolarCity a shorter leash as its losses continue to widen. In the last quarter alone, the company’s earnings went from -$146.7 million to -$283.1 million, reflecting a 93% increase. (Source: “SolarCity First Quarter 2016 Shareholder Letter,” SolarCity Corp, May 9, 2016.)

This wouldn’t be as big a problem if we were in a bull market. Investors are more willing to skip short-term gains in favor of a long-term outlook if the market is optimistic, but that hasn’t been the case in 2016.

After all, this is a year that started off with a minor stock market crash. The first week of January was horrific. Since then, the market has been unforgiving to stocks with high price-to-earnings multiples. There has been a return to fundamentals.

Unfortunately, that’s not exactly the best environment for SolarCity to thrive in. This is a firm deigned to change the entire nature of energy: it’s a big-picture company. Until it’s able to deliver some really positive news, or else we enter a bull market, I’m staying on the sidelines for SCTY stock.

As a side note, there’s something else the executives at SolarCity should consider. Hey, Lyndon Rive, I’m talking to you here. Elon Musk is too busy running SpaceX and Tesla Motors Inc, so you should pay attention to this.

I said earlier that leasing solar panels is similar to leasing cars. But with cars, there’s a separation between the manufacturer and the leasing corporation. Those are two different companies that operate two distinct businesses.

What’s great is that each company specializes in its own field: one of them at making lease agreements, the other at building cars. That division of labor makes the business model work. If SolarCity is imitating that model, why is it just one company?

Spinning off one of its divisions might be a smart idea for SolarCity.