Myth Buster: This Analyst Is Convinced SolarCity Shares Are Ripe For A Bounce

On Tuesday, Raymond James hosted a few investor meetings with SolarCity Corp SCTY, following the decline seen in the stock last week, triggered by a trim in installation guidance for 2016. In a report issued Wednesday, analyst Pavel Molchanov reiterated a Strong Buy rating on the stock, and addressed three major problems that investors have been worried about lately, explaining why the firm remains “convinced that the stock is oversold and ripe for a bounce / short squeeze.”

Myth #1: Residential PV Demand Is Disappearing

While it is true that SolarCity’s growth outlook of 15 to 20 percent for 2016 implies a slowdown, there is no evidence of a much-cited saturation of the residential PV market in the U.S. – leaving Hawaii aside. In fact, “There is ample latent demand, in established state markets as well as new ones,” the report assured.

Moreover, the experts noted, while it may be true that utilities have been successfully blocking rooftop PV, “net metering will become a moot point once storage goes mainstream.”

Myth #2: Financing Is A Problem

While Jim Chanos and other SolarCity shorts have argued that financing in the solar sector is a struggle, comparing the company with the bankrupt SunEdison, the truth is that the firm has never had trouble raising project-level capital. “Despite a high-yield landscape that has clearly seen better days, SolarCity successfully priced two securitizations year-to-date,” Molchanov pointed out.

Myth #3: The 6% Discount Rate Is No Longer Believable

Shares have re-rated to where they currently stand, “at a small discount to the $21/share net present value (fully installed, fully contracted) of the OpCo,” Raymond James explained. “A year ago, the multiple of NPV was close to 3x. Why is the market more skeptical about the 6% discount rate that has been SolarCity's (and its peers') mantra since going public?” the expert asked.

The report went on to expound that the latest securitization was completed at 6.25 percent, while the Hancock deal was done at 8 percent. This suggests that 6 percent is too low. However, sub-5 percent deals seen in previous years would imply the opposite.

“The fact of the matter is that there is no clear-cut answer. The proper discount rate is a matter of judgment, and there will be variability over time… Patient investors can take advantage of the stock's current entry point while waiting for the market to regain confidence in the 6%,” Molchanov concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.