SCTY Stock Needs Better Funding
SolarCity Corp’s (NASDAQ:SCTY) recent quarter was nothing to write home about, but it had a silver lining or two. If the company can use those tidbits of good news as a stepping-stone, SCTY stock could conceivably reach its old high.
The road will be long, but it’s not impossible if the company aims for the right landmarks. Luckily, there is some evidence suggesting that is already happening. The company is working hard to improve its financial situation in the hopes that it will propel the stock.
On the other hand, it may not work.
You could say that SolarCity is standing at a fork in the road. Here are the two paths it could take:
Path #1: Fixing the Financials
SolarCity’s top brass used to be obsessed with how many installations they had tucked under their belts.
Their stated goal was to reach one million customers by the end of 2018. That was the company’s guidance, so investors used it as a yardstick.
It was an ambitious target that sent SCTY stock surging…for a little while. But soon, it became obvious that SolarCity had shot itself in the foot by setting such lofty guidance.
One million installations may sound like good public relations, but it is effectively meaningless. It is just an arbitrary measuring stick that doesn’t really tell you anything useful about the company. The company had overreached; that much was clear.
But instead of watching the number of installations, I’m way more interested in seeing SolarCity work out its financing channels. The company’s widening losses are far scarier than lackluster sales growth.
After all, it’s not the end of the world to see 10,000 new installations when you were aiming for 15,000, but a bad financing model can do serious damage. Businesses exist to make money. At the end of the day, if you can’t do that, you might as well pack up and call it quits.
When I see SolarCity dropping its installation costs by six percent year-over-year, it makes me hopeful the stock can recover lost value. When you remove its investment in module manufacturing, SolarCity is actually cash positive. (Source: “SolarCity Q1 2016 Review,” SolarCity Corp, May 9, 2016.)
This investment into module manufacturing is simply the company’s investment into its own future. Any breakthroughs developed in that research will help bring high-efficiency solar panels to market, which can only make solar energy more attractive.
SolarCity has been highlighting this metric a lot lately. It’s trying to make sure the financing model is sustainable before accelerating its expansion plans.
Considering what happened to Sunedison Inc (OTCMKTS:SUNEQ), being cautious seems a reasonable choice. SUNE stock crumbled under the weight of its debt load. SolarCity could forestall that by continuing to edge its way toward positive cash flow.
Path #2: Too Little, Too Late
The other possible outcome is far worse, especially for SCTY stock shareholders. Let’s say the company carefully balances the spread between its income and interest expenses. It is still enormously vulnerable to a sudden shock.
What happens, for instance, if the Federal Reserve raises interest rates earlier than expected? Just a few months ago, it seemed nearly impossible, but those odds are starting to change. The U.S. economy is picking up speed, raising the possibility of a 2016 hike.
SolarCity would get pushed further into the red if it suddenly had to spend a lot more cash on financing its debt. In turn, that would mean the company misses next quarter’s guidance.
The weak performance would shake confidence in the firm’s financing model, effectively ending its chances for a recovery. At that point I would recommend that you keep your money on the sidelines, because investors can be unforgiving in such situations.
We’ve seen that story play out with SunEdison. The market was brutal in eviscerating SUNE stock, dragging it down from $30.00 to a mere $0.34 per share.
But SolarCity doesn’t have to follow SunEdison down this path. As long as it remains focused on improving its financials, SolarCity still has a shot at insulating itself from unwanted surprises. All SCTY stock needs is for investors to see a “path to profits.”
There’s a short window for SolarCity to provide this roadmap to success. I would say the deadline is the start of 2017. If it chooses path #1, the potential returns could be huge.