Solar City, the green energy project championed by tech billionaire Elon Musk, got a dose of bad news from Wall Street last week.
The company’s stock is trending downward and took another hit as two major investment banks advised investors to stay away, citing concerns about Solar City’s high levels of debt and an overall business plan dependent on dwindling subsidies from states and the federal government.
JP Morgan downgraded its projection for Solar City’s stock, which was trading at $18.01 per share when markets closed on Tuesday. The bank slashed its price target for Solar City from $44 per share to $29 per share
“SolarCity is having trouble attracting new investors, as the company has launched and canceled programs and altered its accounting methods,” JPMorgan wrote in a message to clients, according to MarketWatch, a Wall Street insider publication.
Barclay’s, another investment bank, downgraded Solar City’s stock in early February, setting a new price target of $20 per share, down from a previous target of $49 per share.
Experts on Wall Street are starting to figure out that Musk’s highly touted rooftop solar panel project might not be all it is cracked up to be. Once upon a time, Solar City claimed that someone was switching to its service every three minutes. Investors bought the hype, and the company’s stock peaked at more than $85 per share in February 2014.
A deep look at the company’s filings with the Securities and Exchange Commission revealed a different story.
As Watchdog reported in March 2014, Solar City posted $55 million in losses during 2013 and ran a deficit of more than $166 million. Burdened by high debt and a dependence on government subsidies, the company told the SEC that it might have a hard time attracting additional customers in future years.
“If, for any reason, we are unable to finance solar energy systems through tax-advantaged structures … we may no longer be able to provide solar energy systems to new customers on an economically viable basis,” SolarCity’s third quarter 2013 report said. “This would have a material adverse effect on our business, financial condition and results of operations.”
Solar City’s business plan allowed homeowners to lease rooftop solar panels as a way of lowering their electric bills, while Solar City retained ownership of the panels, allowing it to pocket federal and state tax incentives. It was supposed to be a win-win proposition for homeowners and investors alike.
Except the playing field has changed since the company launched in 2006.
SolarCity gets two major forms of assistance from the federal government — direct grants that were available through the U.S. Treasury’s Section 1603 program, a part of the federal stimulus from 2009, and investment tax credits that are worth 30 percent of the value of newly installed solar energy systems.
But both of those programs have been phased down over the last two years. The investment tax credits will be gone entirely at the end of this year.
States have also cut back on their subsidies for solar energy, further denting the Solar City business model.
Then, a major shake-up occurred when Nevada changed its regulations regarding net metering. Previously, homeowners with solar panels had been able to sell excess electricity back to the power grid, effectively reducing power bills to zero, a process known as “net metering.”
Last year, the Nevada Public Utility Commission approved new rules that brought an end to net metering, greatly reducing the value of having rooftop solar panels in one of the states where Solar City had seen the most growth.
Without net metering payments, rooftop solar “makes no financial sense for a consumer,” Lyndon Rive, Solar City’s CEO, told The New York Times in February.
George Conboy, president of Brighton Securities, a financial firm based in upstate New York, told Watchdog in March 2014 that he was skeptical of Solar City’s soaring stock price and believed it was partially caused by the government’s investments in alternative energy.
Conboy said he expects things to go badly once the federal grants and tax breaks expire.
“If you subsidize something, you’ll get plenty of it — at least until you stop subsidizing it,” Conboy said at the time. “And when that happens, the market can be pretty vicious about finding its own level.”
Two years later, that seems to be exactly what has happened.
“SolarCity’s weaknesses include its generally high debt management risk, weak operating cash flow, generally disappointing historical performance in the stock itself and poor profit margins,” The Street, which provides financial news and analysis, reported last week.