Elon Musk groupies' SolarCity tan lacks a good base. Shares in the solar-panel leasing firm part-owned by the tech guru have almost quintupled since its stock-market debut in December, even allowing for a recent drop. But SolarCity probably won't turn a profit till 2016 and is at best worth half its current $2.9-billion (U.S.) valuation.
The company certainly has an appeal. Less than 1 per cent of U.S. houses sport panels, but this is expected to grow thanks to growing public awareness, lower prices and government assistance.
And SolarCity struck on an innovative way to fit solar panels at little or no upfront cost to homeowners. Other companies bear the installation cost – such as Google and U.S. Bancorp and then benefit from generous tax credits. SolarCity, meanwhile, charges for leases and providing electricity.
The company, though, is likely to remain unprofitable for some time yet. Investors in such companies know they have to be patient, but SolarCity currently trades at a vertiginous eight times estimated 2015 revenue – a year in which it is still likely to be in the red. The alternative energy provider has no exact peers, but companies with similar lease-based income streams, including Time Warner Cable and home security provider ADT, trade on just two times 2015 revenue.
Such a premium may be defensible if SolarCity starts growing the bottom line quickly thereafter. But that's likely to remain relatively low. Even using discounted cash flow doesn't justify the stock price. Raymond James estimates cash flow to 2017 is $1.9-billion. Factor in a 6 per cent discount rate and some 25 per cent dilution from options and warrants and the company's worth just $20 a share – almost half its current price.
And there are risks including higher interest rates and a reduction in the tax credits that are central to its operations. On top of that, side deals with the companies who finance installing the panels make SolarCity's earnings hard to predict and the barrier to entering its leasing business may not be that high.
That's not to dismiss the company's potential. But investors hoping Mr. Musk can work his magic on SolarCity as he has at Tesla may be placing too much faith in him.