SolarCity’s Investor Disconnect

by Debra Fiakas CFA

This week solar panel installer SolarCity (SCTY:  Nasdaq) made its first earnings announcement following its initial public offering in December 2012.  The event was much anticipated even if only to get a glimpse of the company’s most notable (or it’s that notorious?) investor Elan Musk. 

Billionaire Musk was mostly recently in the public eye because of a spat with a New York Times reporter over one of Musk’s other major investments, Tesla Motors (TSLA:  Nasdaq).  The reporter was entrusted to road test one of Tesla’s electric sports cars and ended up writing a scathing article about the failure of the car to hold up to performance promises.   It turned out to be one of those “they said this and he said that” situations with Musk and reporter talking past each other in the social media.  In the end Musk prevailed after Washington Post and CNN reporters figured out their fellow journalist at the New York Times was probably just not car savvy enough to make a road trip in any car, let alone one that requires consistent driving skills as well as a strategy for charging batteries.

Musk came out of the road test brouhaha a bit diluted in my view.  So it seems SolarCity is in the same shape as its largest shareholder. 

SolarCity reported $14.0 million in total revenue in the December 2012 quarter, twice the top-line in the prior-year quarter.  That sort of top-line growth was expected.  Unfortunately, SolarCity reported a much deeper loss than expected  –  $0.54 per share compared to the consensus estimate of $0.44.  For all the billions invested by professionals there, a dime is big on Wall Street.  The stock price immediately gapped down by 8.2% as trading opened the morning after SolarCity’s earnings release and conference call.

Admittedly, my interest in SolarCity is after the fact.  I am always amazed at the hair trigger response of investors to quarterly earnings surprise, especially when an unseasoned security like SCTY is the target.  Certainly, the “shortfall” or “upside” is an instructive guide for investment decision makers, but only when the benchmark consensus is reliable.

In fact, there is quite a bit of dissent in the SolarCity earnings consensus.  There are seven contributors to the Thomson Reuter’s consensus estimate for the March 2013 quarter.  The mean estimate is a negative $0.29 per share on $29.2 million in revenue.  However, the range of estimates is so wide you have to wonder if these seven analysts are looking at the same company.  The lowest earnings estimate is a loss of $0.48 per share and the highest is a loss of $0.04 per share.  That is a pretty wide range in viewpoint.  Some of this can be explained by disagreement on the amount of sales the company will record in the quarter.  The range of sales estimates is from a low of $21.3 million to $33.8 million.  Still, it appears there is some difference of opinion on costs and expenses as well that is driving loss estimates.   The same sort of disagreement is in evidence for year 2013 and year 2014 estimates.

Granted, a group of analysts will have differences in expectations for any given company.  However, just three months after the SolarCity IPO, you would not expect to see such wide disparity in estimates.  After all, the roadshow exercise should have laid SolarCity open to a fairly thorough vetting.  What is more all analysts would have started from largely the same vantage point  –  the prospectus.

 Yet here we are today with SCTY trading 15% off its pre-earnings release price at $19.27 per share  –  all because the company failed to report earnings in alignment with what is clearly a jumbled set of expectations.  Should a company be held accountable when investors cannot agree on a benchmark?

Perhaps the more important question is why so many smart people cannot pin down sales and profits in the first place.  Could it be that SolarCity’s communication with investors is…well…lacking? Indeed, there may be a bit of pattern here in Mr. Musk’s investment portfolio.  Both Tesla and SolarCity appear to have trouble getting their message across to the public about performance expectations.

Fortunately, for those of us who are late to the party, disconnection of this sort presents a perfect buying opportunity.  Next post, we will look at all the reasons a long position in SCTY makes sense and a few more reasons to be cautious.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.