Elon Musk's Blinding Optimism On SolarCity Fails To Brighten This Top-Rated Analyst's View

Tesla Motors IncTSLA
's CEO Elon Musk
pitched to investors early this week
the rationale behind the company's proposed acquisition of
SolarCity CorpSCTY
.

Investors weren't necessarily won over, as SolarCity's stock lost more than 2 percent on Wednesday, but some sources, such as Clean Technica, are arguing that Musk's case was a "no brainer" and backed by "a lot of big numbers."

Some analysts, such as Trip Chowdhry of Global Equities Research are convinced, but investors are always better off hearing both sides of the story.

Benzinga reached out to Gordon Johnson of Axiom Capital, who is among the top solar analysts on the Street, to see if he agreed the merger is a "no brainer."

Johnson referred Benzinga to some of his prior research notes, which summed up his view and made no indication that his sentiment on the prospect of the merger has changed.

Net Metering

In a research report dated June 28, Johnson started off by explaining the concept of net metering, which is the process in which solar customers essentially feed their excess solar energy back into the grid for a set price or the equivalent of free battery storage in the form of the electricity grid.

"Yet, and underpinning the temerity of comments from Elon Musk that this acquisition is a 'no brainer,' after discussions with U.S. solar market experts over the weekend/yesterday, it is our belief that given current regulations, net metering mitigates, to essentially zero, the need for residential battery systems the likes of which both TSLA (NC) sells and used as the key rationale for buying SCTY — because the grid effectively functions as a storage unit," the analyst elaborated.

Johnson added that even Tesla's director of Powertrain business development principally agreed and stated, "Net metering is essentially a free battery [...] you basically sell your power back to the utility, then you just buy it back at the same rate later. So it's hard to compete."

With that said, Johnson believes the lack of synergies and added costs (through training Tesla's salespeople to also sell solar panels and related products) will actually result in a rise in COGS (cost of goods sold) under a merger — not a decrease as Musk believes.

SolarCity Is Valued At Less Than $8 Per Share

In a research report on September 13, Johnson's valuation model suggests SolarCity's stock is worth less than $8 per share.

Here is his rationale:

    "On slide 9 of SCTY's 2Q16 earnings deck (Ex. 1), the company provides expected unlevered cash flows associated w/ its PowerCo's current cumulative installed base (i.e., 2.2GW). Thus, w/ SCTY's admission that the market is moving toward an ownership model (Ex. 4) – implying little or no future retained value – & sensitizing our model to a 7.4 percent unlevered discount rate (i.e. the amount paid by fund associated w/ Quantum) to derive NPV (Ex. 5), the PowerCo is worth $2.8 billion (or $28/shr). Yet, w/ $1.8 billion in project-level debt, ignoring the DevCo, SCTY's PowerCo is worth ~$948 million ($9.5/shr); however, when including the remaining $1.2bn in recourse debt, SCTY's PowerCo would be worth -$266 million (-$2.7/shr). Thus, even w/ the bullish camp's ~$10/shr ascribed to SCTY's DevCo (implying a total value of <$8/shr adjusting for debt)."
Image Credit: By Heisenberg Media (Flickr: Elon Musk - The Summit 2013) [CC BY 2.0], via Wikimedia Commons
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Posted In: Analyst ColorCommoditiesM&AMarketsAnalyst RatingsTrading IdeasInterviewClean TechnicaElon MuskGordon Johnsonsolar companiesSolar StocksTeslaTesla SolarCity MergerTrip Chowdhry
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