SolarCity Might Miss Guidance This Quarter, New Checks Show

• SolarCity Corp SCTY shares are down 27 percent year-to-date, and are trading close to the low end of their 52-week range of $34.65 - $63.79.
• Roth Capital Markets’ Philip Shen maintained a Buy rating on the company, while reducing the price target from $98 to $70.
• Checks indicate that the company could miss its 3Q guidance, while growth could slow going ahead, Shen said.

Analyst Philip Shen pointed out that SolarCity’s Q3 installation guidance of 260MW implies about 38 percent sequential growth. The last time the company was able to generate this level of growth was in 3Q13 when it was less than 30 percent of its current size, in terms of MWs.

Moreover, SolarCity’s 4Q guidance implies 38 percent sequential and 103 percent y/y growth. Checks indicate that it is becoming increasingly difficult to lower customer acquisition costs, Shen added. If this is the case, the 2017 expectations may need to be tweaked.

SolarCity appears well positioned to gain share through 2016, Shen commented. While Vivint Solar Inc VSLR is likely to be under pressure on account of integration issues with Sunedison Inc SUNE, NRG Energy Inc NRG may not have adequate finances to fund growth due to its plan to spinoff NRG Home. Also, Sunrun Inc RUN has a creation cost of $4.08/W in 2Q, which is behind SolarCity’s total cost of $2.91/W.

In the report Roth Capital Markets noted, “With the stock down 32% since Q2 and 45% short interest vs. float, SCTY is primed for a short squeeze, in our view, if the company (1) exceeds installation expectations and (2) delivers better-than-expected progress on cost reductions.”

While checks and demand data analysis do indicate that SolarCity may not be able to achieve its Q3 guidance, the Buy rating has been maintained in view of the company’s industry leading position. The price target has been reduced “to reflect potential slowing growth,” Shen wrote.