Professional Documents
Culture Documents
May 4, 2016
The Good, the Bad, & the Ugly. In a widely anticipated move
(evidenced by the recent outperformance of SCTYs shrs), yesterday
SCTY announced its first-ever cash equity deal w/ John Hancock
Financial (JHF). Under the terms of the deal, SCTY will sell 95% of
the cash flows generated from a portfolio of 201MW of residential &
commercial solar projects to JHF over the next 20yrs. The Good: in
return for the cash flows, SCTY will receive $227mn in upfront equity,
while retaining a 5% minority interest over 20yrs; including tax equity
investments + upfront rebates/prepayments, this transaction will raise
$3.00/W in total financing (or ~$603mn), & reflects a blend of $2.35/W
for commercial projects & $3.24/W for residential projects; the IRR is
~8.2%; the majority of the installations were completed in 15; the
projects are spread over 18 states, w/ no single state comprising
>35% of the portfolio; & the avg. FICO score for the residential
customers is 744. The Bad: when looking at just the cash equity
proceeds from this deal ($227mn) while we recognize an additional
$376mn in cash, ~$346mn of which is tax-equity (TE), has already
been received, while, technically, TE is available for general corp.
purposes, given its largely been spent to offset the CAPEX of the
systems themselves (meaning, in reality, it is not available), we feel
the relevant metric to analyze is the cash equity received, or the cash
available for new project investment/debt retirement adjusting for
SCTYs 5% ownership, a more normalized 50% mix of SRECs from
CA, and then applying these metrics to SCTYs existing installed base
of 1.67GW (i.e., 1.8GW of cum. deployed GWs - 177MW of MyPower
loans [MyPower loans have no tax equity]), adjusted for debt, the
Silevo earn out, unrestricted cash, the book value of MyPower, the full
renewal value, & a 35% tax rate, we derive a fair value for SCTYs
PowerCo of just $0.71/shr (Ex. 6). The Ugly: $2.71/W in costs (Ex. 7)
- $1.38/W in tax equity (Ex. 8) - $0.07/W in rebates/repayments (Ex.
9) = $1.25/W in funding needs; yet cash equity proceeds from JHF
were just $1.18/W, meaning SCTY sold at a loss. Caveat emptor.
Dark Clouds Ahead? We believe a mild bookings trend borne out of
SCTYs decision to leave NV, & withdraw MyPower, will compel an
annual guidance cut when the company reports earnings next week.
1
EPS (Non-GAAP )
Senior Analyst/MD
212-521-3811
gjohnson@axiomcapital.com
James A. Bardowski
Senior Associate/VP
212-521-3852
jbardowski@axiomcapital.com
Fundamental Data
Price Target
$7
Current Price
$26.45
52 Wk Hi-Low
$64-$16
$2,723
103
Float (MM)
64
6,300
Exchange
NASDAQ
ROE (2016E)
-12.4%
Debt-to-Capital (current)
60.9%
Price Performance
SCTY
S&P 500
NA
YTD
LTM
-48.2%
-57.1%
1.0%
-2.1%
2014
2015
Prior
2016E
Prior
2017E
1Q
($0.82)
($1.52)
($2.38)
($2.49)
UR
($2.44)
2Q
($0.96)
($1.61)
($1.97)
($2.37)
UR
($1.82)
3Q
($0.71)
($2.41)
($1.53)
($2.29)
UR
($2.00)
4Q
($1.52)
($2.25)
($1.43)
($2.64)
UR
($2.51)
FY (Dec.)
($4.05)
($7.91)
($7.30)
($9.79)
UR
($8.77)
($7.37)
($9.13)
($8.32)
($8.60)
Consensus
Gordon L. Johnson II
Note: (1) In accordance with SCTY reporting, non-GAAP EPS are based on consolidated net income.
Source: Axiom Capital Research, company filings, Bloomberg
$80
$60
$40
$20
$0
2013
2014
2015
2016
DO NOT REDISTRIBUTE and DO NOT FORWARD This document is solely limited to clients of Axiom
Capital Management. DISCLOSURES: Please refer to the end of this report for Analyst Certifications,
Important Disclosures, and Other Disclosures.
SolarCity Corp.
May 4, 2016
Investment Conclusion
SolarCitys share price has traded down 48.2% YTD, underperforming our custom weighted-average Axiom
Module/Cell OEM Index (i.e., JASO, TSL, YGE, JKS, CSIQ, CSUN, HQCL, SCTY, FSLR, SPWR, Neo Solar,
Motech, Gintech, and E-Ton), which is down 31.0% YTD, and our custom Axiom Polysilicon OEM Index (GCL,
WCH, DQ, REC, OCI, SOL, Sino-Am, and TBEA), which is up 5.4% YTD. Furthermore, along the same YTD
timeframe, SCTY has underperformed our Axiom PV OEM Index (MBTN and ASYS), which is down 35.0%
YTD, while the broader market index (as measured by the S&P 500) has returned 1.0% YTD. See Exhibit 3
below for recent share price performance and Axioms ratings for the stocks that make up our custom indexes.
The Good a Nice Deal on the Surface. There are a number of anecdotal positives associated with this
deal, to include: (a) it is with a respected counterparty in John Hancock Financial (JHF), (b) SCTY is retaining
5% of the cash flows generated from the portfolio of 201MW of residential and commercial solar project cash
flows to JHF over the next 20 years, (c) SCTY is receiving $227mn in upfront cash equity, (d) including tax
equity investments and upfront rebates/prepayments, this transaction will raise $3.00/W in total financing, or
roughly $603mn, (e) this transaction reflects a blend of $2.35/W for commercial projects and $3.24/W for
residential projects, (f) the internal rate of return (IRR) on the portfolio is approximately 8.2%, (g) the majority
of the installations were completed in 2015 (suggesting little risk of cherry-picked projects), (h) the projects are
spread over 18 states, with no single state comprising over 35% of the portfolio (meaning California, or the
highest margin state, was not the majority of the portfolio), and (i) the average FICO score for the residential
customers is 744 (in line with the average score for SCTYs aggregate portfolio of projects).
Yet, and addressing among the key bear points emboldening many of the shorts in this stock, this deal
suggests, at face value, SCTY has resolved the inability to raise capital, through third-party cash-equity and taxequity financing, in excess of its current cost (i.e., $3.00/W in total capital raised versus its current cost/W of
$2.71). Stated differently, this implies SCTY has a clear path to generating free-cash-flow to fund growth.
The Bad a Fundamental Flaw in the Anecdotal Thesis; and Why We Feel the PowerCo is Far Less
Valuable than Previously Assumed. While many of our peers are raving about the $3.00/W in third-party
capital this deal was able to garner, compared to SCTYs most recent cost structure of $2.71/W, we find two
major flaws with this argument. More specifically: (1) we contend the approximately $346mn in cash tax-equity
associated with this deal is not available to fund growth, or retire debt, as this cash has already largely been
spent to offset the CAPEX of the systems themselves (we believe this represents a general misunderstanding
of how solar tax-equity works versus upfront cash equity injections), and (2) SCTYs $2.71/W in reported
C4Q15 cost is likely artificially low due to SG&A that was delayed into C1Q16 we remind our readers that
SCTY originally guided C4Q15 GAAP OPEX to $245mn to $260mn (or $252.5mn at the mid-point), but
ultimately reported $227mn, with S&M well below our estimates (Exhibit 1); while we contend this optically
helped their cost structure look good in C4Q15, we believe the company is now having to reverse these cuts,
likely pushing costs the wrong way in C1Q16.
Axiomcapital.com
Page 2 of 14
SolarCity Corp.
May 4, 2016
Ingot/Wafer
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Source: SCTY C3Q15 Earnings Presentation Page 10, Axiom Capital research.
Valuing the PowerCo. To value the PowerCo, using the JHF as the basis, we note the following assumptions
(in no
particular order) see
Exhibit 6 below for buildout:
Polysilicon
Ingot/Wafer
Cells
100
Module 400
System 5,000
~
play ers
play ers
>
pla yers
SCTY has virtually no net-operating-loss-carryforwards (NOLs), implying the need to factor in some tax
liability (in Exhibit 6 below, we show the impact with a 35% tax rate and without);
SCTYs total current installed base is 1,670MW (or 1,847MW 177MW in MyPower loans);
Axiomcapital.com
Page 3 of 14
SolarCity Corp.
May 4, 2016
$251mn book value for MyPower loans (we assume the book value of MyPower as a credit in our valuation
framework we do not believe SCTY can sell these assets under similar economics as those sold in the
JHF transaction as there is no associated tax equity [the math is much different]); and
$540mn in full renewal value $782M was the unlevered retained value as of C4Q15 for the renewal
period; thus, we change the discount rate impact from 6% to 8% (using a real DCF, not their numbers and
not just taking 8% over 6% which is 33%), which is 31%; thus, the unlevered retained value at 8% comes to
$540 million untaxed, or $5.3/share.
Summary. When adding it all up, the full value of SCTYs PowerCo today, using yesterdays JHF deal as a
precedent, is $111mn (or $1.10/share) excluding taxes, or $72mn (or $0.71/share) including taxes. Under this
backdrop, we remind our readers that when we first initiated coverage on SCTY 10/19/15, we were valuing the
companys PowerCo and DevCo at $14/share and $9.9/share, respectively, versus our current approach of
valuing the company using a peer group of specialty financial companies. In this fashion, as the lions share of
our peers begin to look at the value of this deal using just the cash equity portion if SCTY had received full
proceeds the company would have reported $3.00/W 201MW, or $603mn, but that's not the case, and thus
proceeds of $227mn were reported we believe the lack of value in the PowerCo, and by default DevCo, will
begin to crystalize in the way the Street views the longer-term valuation for this company.
The Ugly Looking at this from the Most Simplistic of Viewpoints, it Appears SCTY Sold these Cash
Flows at a Loss. While SCTY provides a bevy of financial definitions, some of which we believe continue to
confound our peers on the Street (i.e., tax equity, and its use as a form of upfront cash) as was the case with
SUNE, in the most simplistic way we know how, we attempt to show readers in this section a back-of-theenvelope approach to figuring out if SCTY made money on the deal with JHF, or lost money. That is, taking
SCTYs most recently reported cost/W of $2.71 (Exhibit 7) - $1.38/W in tax equity (Exhibit 8) - $0.07/W in
rebates/repayments (Exhibit 9), one can calculate SCTYs funding needs of $1.25/W. Yet, with cash equity
proceeds from the sale of 201MW of project cash flows to JHF for just $1.18/W, in the most simplistic of terms,
SCTY sold the portfolio to JHF at a loss.
Conclusion. Overall, yesterday, for all intents and purposes, SCTY got an investment from JHF it was not a
project sale. SCTY retained ownership but, sold off 95% of their cash flows. In our view, what Consensus
appears to have missed in all of this, in addition to the fact that the tax-equity cash flows are not available for
immediate redeployment for growth/debt pay down, is that SCTY sold the cash flows, but kept the debt (this is
not sustainable). While SCTY could indeed use the proceeds from the sale to reduce their growing debt
obligation, they are likely going to use them to grow their installed base.
Stepping back, we ask our readers would you do this? That is, would you ramp up leverage, in return for
growth, at the expense of negative free cash flows? We dont think so as it is value destructive (no matter what
SCTY says), and is being done, we believe, to show investors growth at any cost (and, as this deal shows, it is
costing dearly). As this becomes more broadly understood, we expect the shares to come under intense
pressure.
Axiomcapital.com
Page 4 of 14
SolarCity Corp.
May 4, 2016
Updated estimates? Based on our updated model, in which we give credit to SCTY for total solar installations
of 1.10GW in 2016, versus guidance of 1.25GW, our 2016 revenue/adjusted EPS estimates adjust to
$665.4mn/-$9.79, from $850.6mn/-$7.30 previously (Consensus estimates of $618.1mn/-$9.13). In addition, we
introduce our 2017 revenue/adjusted EPS estimates, on 1.08GW of total solar installations, of $870.2mn/-$8.77
(Consensus estimates of $942.6mn/-$8.60). Of note, SCTY recently shelved its MyPower loan product and
concurrently confirmed that MyPower will be replaced with another, more superior loan product, yet this product
has not been unveiled; for this reason, our model assumes a greater reliance on leases. See Exhibit 10 below
for our SCTY consolidated pro forma statement of operations.
Valuation. As we see it, at its core, SCTY is an originator/aggregator and servicer of residential solar leases
and PPAs, or a middle man, if you will, in providing homeowners with solar loans, allowing consumers, who
otherwise couldnt afford it, the benefits of having a solar system installed on the rooftop (i.e., lower immediate
energy costs, due mainly to government incentives [i.e., investment tax credit (ITC)] and favorable caveats
[i.e., net metering]). By this thinking, we would go so far as to postulate that SCTY is more of a bank than a
solar company. However, unlike a bank, which benefits when rates go up by issuing more loans at higher rates,
should SCTY attempt to raise its rates to customers, customer spreads would shrink, materially tarnishing
SCTYs value proposition stated differently, we view SCTY as a de facto bank, with all the risks, but none of
the benefits.
In this fashion, as investors move to valuing SCTY as a specialty finance company, which we expect to define
2016, versus what many have historically seen as a high-growth solar vendor, we expect its valuation to move
closer to that of its specialty finance (mortgage) peers.
Thus, looking to Exhibit 2 below, observing SCTYs specialty finance/mortgage peer group average P/B
multiple of about 0.9x (unchanged from our prior note), which is notably skewed higher by SolarCitys multiple,
we believe the companys fair value at present is $7/share (74% downside from yesterdays closing price),
unchanged from our prior valuation.
Exhibit 2: SCTY P/B Build vs. Specialty Finance (Mortgage) Vendors
Polysilicon
>40 play ers
Ingot/Wafer
Cells
Price ($)
$26.45
$16.91
$2.09
$13.17
$12.21
$5.60
$5.26
~100
50 pla yers
play ers
SolarCity
Ellington Financial LLC
Ocwen Fincl. Corp.
PennyMac Mortgage Invst. Trust
PHH Corp.
Stonegate Mortgage Corp.
Walter Investment Mgmt. Corp.
Average
BV/Shr
P/B
Module 400
$8.53 play ers 3.1x
$22.10
0.8x
$5.95
0.4x
$20.28
0.6x
$23.96
0.5x
$10.14
0.6x
$17.74
0.3x
$15.80
0.9x
~
Polysilicon
Ingot/Wafer
Axiomcapital.com
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Page 5 of 14
SolarCity Corp.
May 4, 2016
Ingot/Wafer
Peer Group
Company
MODULE/CELL VENDORS
JASO
JA Solar Holdings Co Ltd
TSL
Trina Solar Ltd
YGE
Yingli Green Energy Holding Co
JKS
JinkoSolar Holding Co Ltd
CSIQ
Canadian Solar Inc
CSUN
China Sunergy Co Ltd
HQCL
Hanwha Q CELLS Co Ltd
SCTY
SolarCity Corp
FSLR
First Solar Inc
SPWR
SunPower Corp
3576 TT*
Neo Solar Power Corp
6244 TT*
Motech Industries Inc
3514 TT*
Gintech Energy Corp
3452 TT*
E-Ton Solar Tech Co Ltd
Subgroup: Value-Wgtd Avg
Covered Companies' Equal-Wgtd Avg
PV EQUIPMENT VENDORS
MBTN*
Meyer Burger Technology AG
ASYS
Amtech Systems Inc
Subgroup: Value-Wgtd Avg
Covered Companies' Equal-Wgtd Avg
POLYSILICON VENDORS
3800 HK*
GCL-Poly Energy Holdings Ltd
WCH*
Wacker Chemie AG
DQ
Daqo New Energy Corp
REC*
REC Silicon ASA
010060 KS*
OCI Co Ltd
SOL
ReneSola Ltd
5483 TT*
Sino-American Silicon Products
600089 CH* TBEA Co Ltd
Subgroup: Value-Wgtd Avg
Covered Companies' Equal-Wgtd Avg
S&P 500**
Share Price
Cells
Market Cap
Performance (%)
Module ~ 400
~100
play ers
Axiom
Rating
5/3/2016
($MM)
1Day
1Mo
3Mo
YTD
6Mo
1YR
Sell
Sell
Sell
NC
NC
NC
NC
Sell
NC
NC
Hold
NC
NC
NC
$ 8.40
$ 9.01
$ 3.07
$ 21.04
$ 16.57
$ 0.21
$ 12.52
$ 26.45
$ 52.85
$ 18.33
$ 0.53
$ 0.98
$ 0.71
$0.31
$400
$833
$56
$660
$952
$3
$1,052
$2,600
$5,404
$2,507
$539
$530
$317
$241
-1.9%
-5.0%
-14.7%
-6.1%
-5.4%
0.0%
-0.6%
-10.5%
-3.6%
-5.6%
-1.2%
4.3%
3.6%
-0.5%
-4.6%
-6.6%
-2.8%
-9.2%
-33.3%
4.2%
-12.8%
-23.6%
-16.7%
8.9%
-21.7%
-18.5%
-16.6%
-13.0%
-9.2%
-9.9%
-12.4%
-10.6%
-3.8%
-5.1%
-31.5%
6.4%
-13.7%
-73.6%
-26.4%
-15.7%
-20.5%
-26.3%
-16.5%
-17.2%
-24.6%
-11.5%
-18.1%
-14.5%
-13.4%
-18.2%
-32.2%
-24.0%
-42.8%
-80.9%
-42.9%
-48.2%
-19.9%
-38.9%
-27.3%
-29.0%
-28.9%
-19.4%
-31.0%
-27.9%
-3.9%
-14.4%
-59.0%
-21.6%
-28.7%
-83.1%
-29.6%
-12.3%
-9.4%
-33.3%
-20.3%
-28.6%
-8.1%
-20.0%
-18.0%
-22.0%
-18.8%
-27.9%
-83.8%
-26.9%
-54.3%
-88.6%
-48.3%
-57.1%
-7.8%
-42.8%
-35.1%
-18.5%
18.8%
-38.1%
-30.2%
-44.5%
Buy
NC
$4.07
$5.65
$369
$74
-7.4%
-6.8%
-7.3%
-7.4%
6.6%
-7.5%
4.2%
6.6%
Sell
NC
NC
NC
NC
NC
NC
NC
$0.15
$97.56
$24.69
$0.22
$107.02
$1.26
$1.09
$1.38
$2,706
$5,088
$258
$561
$2,552
$128
$634
$4,469
$2,063
$17,829,058
play ers
pla yers
Note: Subgroup averages are weighted based on current market cap; stocks under our coverage are averaged using an equal-weighting.
Note: (*) For comparison, non-US share prices and market caps are converted to USD.
Note: (**) The benchmark S&P 500 market is based on free-floating shares.
Source: Company data, Bloomberg Consensus estimates, Axiom Capital Research.
Polysilicon
Ingot/Wafer
Axiomcapital.com
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Page 6 of 14
SolarCity Corp.
May 4, 2016
Ingot/Wafer
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Polysilicon
>40 play ers
Ingot/Wafer
~50 pla yers
Ingot/W
afer
1
1Q16
180
$2.66
$1.66
$1.00
$180.2
$180.2
$0.0
Cells
~100
play ers
~100
play ers
Cells
2Q16
357
$2.61
$1.66
$0.95
$338.4
$69.8
$268.7
3Q16
357
$2.55
$1.66
$0.90
$319.7
$0.0
$319.7
Module ~ 400
4Q16
play
357ers
$2.50
$1.66
$0.84
$301.0
$0.0
$301.0
play ers
Module ~ 400
2016
1,250
$2.57
$1.66
$0.91
$1,139.3
$250.0
$889.3
Note: (1) SCTY has guided 180MW in 1Q16 installations; we assume linear installations for the remainder.
Note: (2) SCTY has raised ~$250mn from its latest ABS issuance and MyPower loans for 1Q16 installations; we apply this to 1Q/2Q16 installations.
Note: We assume a linear decrease in SCTY's development costs during 2016, from a reported $2.71/watt exiting 2015 to $2.50/watt exiting 2016.
Note: Tax equity is estimated from SCTY's 4Q15 financials and assumed to carry unchanged.
Source: Company data, Axiom Capital research.
Polysilicon
Ingot/Wafer
Axiomcapital.com
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Page 7 of 14
SolarCity Corp.
May 4, 2016
Exhibit 6: John Hancock Cash Equity Sale Implications for SCTY PowerCo Value
Polysilicon
>40 play ers
Total Portfolio
Ingot/Wafer
Profit
~50 pla yers
MWs Sold
Profit per MW
% Sold
Profit per MW - Adjusted
Less: SREC Benefit on Mix (forecast)
Profit per MW - Adjusted for SREC's
5/2/2016
Cells
~100
play ers
Module
~ 400
$227
play ers
201
$1.13
0.95
$1.19
$0.06
$1.13
% Breakout
Residential
Commercial
73.0%
27.0%
$1.20
$0.95
$1.13
$0.00
C4Q15
1,670
Residential MW
Residential $/watt
Value
1,219
$1.15
$1,402
Commercial MW
Commercial $/watt
Value
451
$0.95
$428
Total MW
Total Value
Taxes
Total Value After Taxes
Less: Recourse Debt
Less: Silevo Earn Out
Plus: Unrestricted Cash
Plus: Book Value of MyPower
Total Value
Shares
1,670
$1,830
$0
$1,830
$1,512
$150
$394
$251
$813
101
5/2/2016
$813
$8.05
$1,242
$12.3
$540
$5.3
$111
$1.10
$72
$0.71
Installed base is calculated by taking deployed MWs less 177MW in MyPower loans (we include a book value for MyPower as a credit, but exclude it from the
deployed base as we don't think they can sell these under the same economics there is no tax equity, thus the math is different.
We adjust the residential value slightly lower to reflect the fact that we are applying a value to the entire portfolio, yet dont know where interest rates are
going (SCTY talked about a 4.5% blended cost of debt 4 months ago rates have barely moved and now SCTY's cost of debt is much higher if rates go
up, the ASP will go down), or if its even possible to sell the entire portolio given counterparties.
$782M was the unlevered retained value as of C4Q15 for the renewal period; thus, we change the discount rate impact from 6% to 8% (using a real DCF, not
their numbers and not just taking 8% over 6% which is 33%), which is 31%; thus, the unlevered retained value at 8% comes to $540 million untaxed, or
$5.3/share.
4
We assume a 35% tax rate.
Source: Company documents, Axiom Capital research.
Axiomcapital.com
Page 8 of 14
SolarCity Corp.
May 4, 2016
Ingot/Wafer
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Polysilicon
Ingot/Wafer
Axiomcapital.com
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Page 9 of 14
SolarCity Corp.
May 4, 2016
Ingot/Wafer
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Ingot/Wafer
~50 pla yers
Polysilicon
Ingot/Wafer
Cells
~100
play ers
~100
play ers
Cells
Module ~ 400
play ers
Module ~ 400
play ers
pla yers
Polysilicon
Ingot/Wafer
Axiomcapital.com
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Page 10 of 14
SolarCity Corp.
May 4, 2016
Exhibit 10: SCTYs Consolidated Statement of Operations Axiom Capital Estimates 2016-2017
Q1
$54.8
$12.7
$67.5
-6%
6%
Fiscal 2015
Cells ~100
Q2
Q3
Q4
Q1E
play ers
$78.3
$85.1
$75.4
$81.2
$24.5
$28.8
$40.1
$49.9
$102.8
$113.9
$115.5
$131.1
52%
11%
1%
14%
68%
95%
61%
94%
Fiscal 2016E
Module ~ 400
Q2E
Q3E
Q4E
play ers
$123.7
$136.6
$115.1
$52.9
$54.6
$51.4
$176.6
$191.2
$166.5
35%
8%
-13%
72%
68%
44%
Q1E
$129.1
$41.9
$171.1
3%
30%
Fiscal 2017E
System > 5,000
Q2E
Q3E
Q4E
pla yers
$193.8
$210.2
$171.0
$42.7
$42.4
$39.2
$236.5
$252.5
$210.1
38%
7%
-17%
34%
32%
26%
$32.3
$13.5
$45.7
$37.4
$22.1
$59.5
$46.0
$42.6
$88.6
$49.9
$37.1
$87.0
$53.9
$46.3
$100.2
$60.4
$47.6
$108.0
$66.8
$48.2
$115.0
$74.4
$46.3
$120.7
$79.9
$42.2
$122.1
$86.1
$41.5
$127.6
$92.0
$42.2
$134.2
$99.2
$40.1
$139.3
Gross profit
$21.8
$43.3
$25.3
$28.5
$30.9
$68.6
$76.2
$45.8
$48.9
$108.9
$118.4
$70.9
$86.7
$48.7
$12.1
$147.4
$113.2
$50.2
$12.4
$175.8
$129.3
$69.4
$17.7
$216.4
$128.1
$76.2
$22.8
$227.0
$142.5
$65.5
$24.9
$232.9
$132.6
$96.9
$26.5
$256.0
$126.3
$95.1
$28.7
$250.1
$120.7
$102.8
$25.0
$248.6
$125.9
$76.3
$25.7
$227.9
$102.3
$87.1
$35.5
$224.9
$125.1
$84.4
$37.9
$247.4
$114.9
$98.2
$31.5
$244.6
($125.7)
($89.3)
($132.4)
($94.4)
($191.1)
($147.4)
($198.6)
($150.0)
($202.0)
($149.8)
($187.4)
($129.1)
($173.9)
($109.8)
($202.7)
($131.8)
($178.9)
($103.5)
($116.0)
($35.2)
($129.1)
($43.0)
($173.7)
($81.2)
$18.5
$2.1
$20.6
$20.5
$2.8
$23.3
$25.9
$16.9
$42.7
$27.1
$4.0
$31.1
$34.6
$4.0
$38.6
$38.2
$4.0
$42.3
$43.4
$4.0
$47.5
$48.9
$4.0
$53.0
$52.9
$4.0
$56.9
$56.1
$4.0
$60.1
$60.6
$4.0
$64.6
$65.6
$4.0
$69.6
($146.3)
($155.7)
($233.8)
($229.7)
($240.6)
($229.6)
($221.3)
($255.7)
($235.9)
($176.1)
($193.7)
($243.3)
($0.6)
($146.9)
($125.4)
($21.5)
($0.0)
($155.7)
($133.4)
($22.4)
($0.5)
($234.3)
($215.2)
($19.1)
($2.2)
($231.9)
($236.5)
$4.6
($2.3)
($242.9)
($218.6)
($24.3)
($2.2)
($231.8)
($204.0)
($27.8)
($2.1)
($223.5)
($196.6)
($26.8)
($2.4)
($258.1)
($227.1)
($31.0)
($2.3)
($238.1)
($209.5)
($28.6)
($1.7)
($177.8)
($156.5)
($21.4)
($1.9)
($195.5)
($172.1)
($23.5)
($2.3)
($245.6)
($216.1)
($29.5)
($0.22)
($0.22)
($1.52)
96.7
96.7
($0.23)
($0.23)
($1.61)
97.0
97.0
($0.20)
($0.20)
($2.41)
97.4
97.4
$0.05
$0.04
($2.25)
97.7
102.9
($0.25)
($0.25)
($2.49)
97.7
97.7
($0.28)
($0.28)
($2.37)
97.7
97.7
($0.27)
($0.27)
($2.29)
97.7
97.7
($0.32)
($0.32)
($2.64)
97.7
97.7
($0.29)
($0.29)
($2.44)
97.7
97.7
($0.22)
($0.22)
($1.82)
97.7
97.7
($0.24)
($0.24)
($2.00)
97.7
97.7
($0.30)
($0.30)
($2.51)
97.7
97.7
Polysilicon
Ingot/Wafer
Fiscal Year-End:
December
>40 play ers
~50
Operating leases and solar energy systems incentives
Solar energy systems and component sales
Total revenue
% Change Q/Q
% Change Y/Y
pla yers
Polysilicon
Ingot/Wafer
Axiomcapital.com
Cells
~100
play ers
Module ~ 400
play ers
pla yers
Page 11 of 14
SolarCity Corp.
May 4, 2016
Net-Metering Prevails. Core to our thesis is our view that utilities are readily gaining ground against the
whole net-metering argument (i.e., whether customers with solar systems should be excluded from fixed
charges on their utility bills) and will likely eventually prevail. If, however, solar proponents somehow are
able to get everything they want, and the states currently reviewing net-metering policies either maintain or
even strengthen the status quo, our thesis would prove invalid.
Interest Rates Stay Lower for Longer. As we see it, low interest rates enable the beneficially low cost of
capital in SCTYs solar loans. While higher interest rates would benefit traditional financial intermediaries,
which generate the preponderance of earnings based on where net interest levels are floating, we posit that
SCTY cannot simply pass on higher interest to its customers, as this would erode the costs savings of
installing rooftop solar. However, if the Federal Reserve indefinitely continues to refrain from raising interest
rates, SCTY would be saved from this inevitability, which runs contrary to our long-term thesis.
Financial Engineering...a Sentiment Play. As we have stated countless times before, we view SolarCity
as a specialty finance / leasing company, versus a solar company. We say this given the complex products
that SCTY offers and difficulty in modeling the company with any degree of precision. In other words, due to
the plethora of assumptions that are required to model SCTY, we see this stock driven more by sentiment,
versus fundamentals. Resultantly, following a similar craze that surrounded YieldCo.s last year, we
acknowledge that SCTYs stock may go higher if the company can reinvigorate investor sentiment by rolling
out new, unforeseen financing products or engaging in more aggressive securitizations of its receivables.
While this is a risk that would certainly void our thesis, we believe it would itself be temporary.
High Short Interest and Inside Ownership. Given the high degree of SCTYs shares already sold short,
we acknowledge that a potential short squeeze could result in a big move higher in the stock. Moreover,
downside to SCTYs share price could be limited by a lack of selling when considering the high amount of
inside ownership.
Please contact your Axiom Capital Research sales person for our dynamic SCTY company model.
Axiomcapital.com
Page 12 of 14
SolarCity Corp.
May 4, 2016
Analyst Certification:
I, Gordon Johnson, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer.
Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this
research report.
Explanation of Ratings
Outperform/Buy We expect the stock to outperform the S&P 500 Index and post absolute price appreciation of at least 10%.
Neutral/Hold We expect the stock to perform in line with the S&P 500 Index.
Underperform/Sell We expect the stock to underperform the S&P 500 Index and post absolute price depreciation of at least 10%
Current distribution of ratings as of May 4, 2016
Rating
Number
Outperform/Buy
14
40%
Neutral/Hold
17%
Underperform/Sell
15
43%
Investment banking services were not provided to any of the companies with the aforementioned ratings. All current required disclosures are available
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by contacting: Compliance Department at 780 Third Avenue, 43 Floor, New York, NY 10017
Valuation Methods for Fundamental Analysis
One or more of the following valuation methods are used in making a price projection: Analysis of the supply and demand for a security to ascertain
how high or low a stock price may move before either overhead supply or underneath demand develops; Analysis of a companys P/E ratio, price/book
ratio, price/cash ratio, earnings expectations or sales growth as they relate within an industry group or to the broader market; Dividend yield of the S&P
500 vs. the yield of the 10-year government bond; Individual sector analysis along with investor sentiment, and Federal Monetary Policy.
Valuation Methods for Technical Analysis
Valuations are based on technical analysis techniques using some or all of the following inputs: trend recognition, pattern recognition, Japanese
candlestick formations, oscillator readings (short-term), relative performance, money flows, support and resistance levels, volume, sentiment indicators,
and seasonal analysis.
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Axiomcapital.com
Page 13 of 14
SolarCity Corp.
May 4, 2016
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is
made regarding future performance. Information, opinions, and estimates contained in this report reflect a judgment at its original date of publication
by Axiom Capital Management, Inc. and are subject to change without notice. The price, value of, and income from any of the securities mentioned in
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Securities recommended, offered, or sold by Axiom Capital Management, Inc.: (1) are not insured by the Federal Deposit Insurance Corporation; (2) are
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invested. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances; you
may be required to pay more money to support these losses.
We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal
in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to this research.
ADDITIONAL DISCLOSURES
The analyst or a member of the analysts family holds a stock or options position in the following securities mentioned in this report: None.
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Options are not suitable for all investors and not all options strategies are suitable for all investors who may be suitable to trade options. At or prior to
being approved for options trading, investors must be given and should read Characteristics and Risks of Standardized Options, the risk disclosure
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Risks associated with the strategies contained herein are included in the discussions on breakeven point, maximum risk and maximum loss discussions,
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Axiom Capital Management, Inc. previously provided to you a copy of the booklet entitled Characteristics and Risks of Standardized Options. A current
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Floor, New York, NY 10017.
Axiomcapital.com
Page 14 of 14