Credit Suisse Upgrade Sends SolarCity Shares Higher

SolarCity SCTY shares rose sharply pre-market after Credit Suisse boosted its rating on the stock. Credit Suisse raised SolarCity to an outperform from a hold and nearly doubled its price target to $52 from $28 previously.

Rationale

Credit Suisse cites a few key reasons for the upgrade. First, they said discussions with California power regulators suggest that the government will support distributed solar generation, against the wishes of utilities, which would be a major boost to solar stocks as a whole. Also, they note that the recent low-cost funding agreement is a positive for the weighted average cost of capital for the company.

They also cite execution benefits leading to downside to cost estimates. "We are upgrading SCTY after our discussions with the California Public Utilities Commission (CPUC), the announcement of an aggregation vehicle of $100-150mm at a relatively low cost of financing, and solid execution driving lower installation costs. While we expect multiple view points on the topic, we are more comfortable that the CPUC and California governor will continue to support distributed solar generation even if the net metering cap is not raised by 2015."

"SCTY's stock price has declined 36% since its peak on May 20th, removing some of the concerns over valuation and the overhang of the lock-up expiration on June 11th. Our fundamental views drive our valuations – we believe the higher float may also expand the investor base by providing higher liquidity for the stock." They raised their 2014 loss per share estimate from $1.73 to $0.58 based on these catalysts.

Cost Declines, Accelerating Growth

One key driver of the valuation is an expected decline in costs for the company. "We have reduced our installation cost estimate from $2.50/Watt to $2.25/Watt due to management commentary that rail-free installations implemented by 3Q13 would be a step-function decline in costs."

The analysts also see growth accelerating in outer years as the company continues to achieve economies of scale. "We are increasing our 2016-2020 MW growth rate from 3% per year to 10% and slowing the decline in the retained value per Watt from 20% per year to 15% in 2016-2020 due to increased comfort on longer term net metering risk."

On an adjusted earnings per share basis, Credit Suisse now expects SolarCity to achieve profitability in 2015. They see SolarCity earning $1.01 per share after losing $1.54 per share this year and losing $0.58 per share next year.

Market Reaction

SolarCIty shares jumped on the news pre-market. Shares rose $2.82 to $36.85 per share, a gain of 8.29 percent. The new price target represents just over 41 percent upside to the current price.