You are on page 1of 14

Equity Research

Alternative Energy – Market Underweight

May 4, 2016

SOLARCITY CORP. (SCTY – $26.45 – SELL)
Is The Entire Sell-Side Incorrectly Giving SCTY Credit For Cash It Can’t Access?

The Good, the Bad, & the Ugly. In a widely anticipated move
(evidenced by the recent outperformance of SCTY’s shrs), yesterday
SCTY announced its first-ever cash equity deal w/ John Hancock
Financial (“JHF”). Under the terms of the deal, SCTY will sell 95% of
the cash flows generated from a portfolio of 201MW of residential &
commercial solar projects to JHF over the next 20yrs. The Good: in
return for the cash flows, SCTY will receive $227mn in upfront equity,
while retaining a 5% minority interest over 20yrs; including tax equity
investments + upfront rebates/prepayments, this transaction will raise
$3.00/W in total financing (or ~$603mn), & reflects a blend of $2.35/W
for commercial projects & $3.24/W for residential projects; the IRR is
~8.2%; the majority of the installations were completed in ’15; the
projects are spread over 18 states, w/ no single state comprising
>35% of the portfolio; & the avg. FICO score for the residential
customers is 744. The Bad: when looking at just the cash equity
proceeds from this deal ($227mn) – while we recognize an additional
$376mn in cash, ~$346mn of which is tax-equity (“TE”), has already
been received, while, technically, TE is available for general corp.
purposes, given it’s largely been spent to offset the CAPEX of the
systems themselves (meaning, in reality, it is not available), we feel
the relevant metric to analyze is the cash equity received, or the cash
available for new project investment/debt retirement – adjusting for
SCTY’s 5% ownership, a more normalized ≥50% mix of SREC’s from
CA, and then applying these metrics to SCTY’s existing installed base
of 1.67GW (i.e., 1.8GW of cum. deployed GWs - 177MW of MyPower
loans [MyPower loans have no tax equity]), adjusted for debt, the
Silevo earn out, unrestricted cash, the book value of MyPower, the full
renewal value, & a 35% tax rate, we derive a fair value for SCTY’s
PowerCo of just $0.71/shr (Ex. 6). The Ugly: $2.71/W in costs (Ex. 7)
- $1.38/W in tax equity (Ex. 8) - $0.07/W in rebates/repayments (Ex.
9) = $1.25/W in funding needs; yet cash equity proceeds from JHF
were just $1.18/W, meaning SCTY sold at a loss. Caveat emptor.
Dark Clouds Ahead? We believe a mild bookings trend borne out of
SCTY’s decision to leave NV, & withdraw MyPower, will compel an
annual guidance cut when the company reports earnings next week.
1

EPS (Non-GAAP )

Senior Analyst/MD
212-521-3811
gjohnson@axiomcapital.com

James A. Bardowski
Senior Associate/VP
212-521-3852
jbardowski@axiomcapital.com
Fundamental Data
Price Target

$7

Current Price

$26.45

52 Wk Hi-Low

$64-$16

Market Cap. ($MM)

$2,723

Shares Out (MM)

103

Float (MM)

64

Avg. Daily Vol ('000)

6,300

Exchange

NASDAQ

ROE (2016E)

-12.4%

Debt-to-Capital (current)

60.9%

Dividend Yield (annualized)

Price Performance
SCTY
S&P 500

NA

YTD

LTM

-48.2%

-57.1%

1.0%

-2.1%

Price Performance 3YR (USD)
$100

2014

2015

Prior

2016E

Prior

2017E

1Q

($0.82)

($1.52)

($2.38)

($2.49)

UR

($2.44)

2Q

($0.96)

($1.61)

($1.97)

($2.37)

UR

($1.82)

3Q

($0.71)

($2.41)

($1.53)

($2.29)

UR

($2.00)

4Q

($1.52)

($2.25)

($1.43)

($2.64)

UR

($2.51)

FY (Dec.)

($4.05)

($7.91)

($7.30)

($9.79)

UR

($8.77)

($7.37)

($9.13)

($8.32)

($8.60)

Consensus

Gordon L. Johnson II

Note: (1) In accordance with SCTY reporting, non-GAAP EPS are based on consolidated net income.
Source: Axiom Capital Research, company filings, Bloomberg

$80
$60
$40
$20

$0
2013

2014

2015

2016

Source: Axiom Capital Research, Bloomberg

DO NOT REDISTRIBUTE and DO NOT FORWARD – This document is solely limited to clients of Axiom
Capital Management. DISCLOSURES: Please refer to the end of this report for Analyst Certifications,
Important Disclosures, and Other Disclosures.

SolarCity Corp.
May 4, 2016

Investment Conclusion
SolarCity’s share price has traded down 48.2% YTD, underperforming our custom weighted-average Axiom
Module/Cell OEM Index (i.e., JASO, TSL, YGE, JKS, CSIQ, CSUN, HQCL, SCTY, FSLR, SPWR, Neo Solar,
Motech, Gintech, and E-Ton), which is down 31.0% YTD, and our custom Axiom Polysilicon OEM Index (GCL,
WCH, DQ, REC, OCI, SOL, Sino-Am, and TBEA), which is up 5.4% YTD. Furthermore, along the same YTD
timeframe, SCTY has underperformed our Axiom PV OEM Index (MBTN and ASYS), which is down 35.0%
YTD, while the broader market index (as measured by the S&P 500) has returned 1.0% YTD. See Exhibit 3
below for recent share price performance and Axiom’s ratings for the stocks that make up our custom indexes.
The Good – a Nice Deal… on the Surface. There are a number of anecdotal positives associated with this
deal, to include: (a) it is with a respected counterparty in John Hancock Financial (“JHF”), (b) SCTY is retaining
5% of the cash flows generated from the portfolio of 201MW of residential and commercial solar project cash
flows to JHF over the next 20 years, (c) SCTY is receiving $227mn in upfront cash equity, (d) including tax
equity investments and upfront rebates/prepayments, this transaction will raise $3.00/W in total financing, or
roughly $603mn, (e) this transaction reflects a blend of $2.35/W for commercial projects and $3.24/W for
residential projects, (f) the internal rate of return (“IRR”) on the portfolio is approximately 8.2%, (g) the majority
of the installations were completed in 2015 (suggesting little risk of cherry-picked projects), (h) the projects are
spread over 18 states, with no single state comprising over 35% of the portfolio (meaning California, or the
highest margin state, was not the majority of the portfolio), and (i) the average FICO score for the residential
customers is 744 (in line with the average score for SCTY’s aggregate portfolio of projects).
Yet, and addressing among the key bear points emboldening many of the shorts in this stock, this deal
suggests, at face value, SCTY has resolved the inability to raise capital, through third-party cash-equity and taxequity financing, in excess of its current cost (i.e., $3.00/W in total capital raised versus its current cost/W of
$2.71). Stated differently, this implies SCTY has a clear path to generating free-cash-flow to fund growth.
The Bad – a Fundamental Flaw in the Anecdotal Thesis; and Why We Feel the PowerCo is Far Less
Valuable than Previously Assumed. While many of our peers are raving about the $3.00/W in third-party
capital this deal was able to garner, compared to SCTY’s most recent cost structure of $2.71/W, we find two
major flaws with this argument. More specifically: (1) we contend the approximately $346mn in cash tax-equity
associated with this deal is not available to fund growth, or retire debt, as this cash has already largely been
spent to offset the CAPEX of the systems themselves (we believe this represents a general misunderstanding
of how solar tax-equity works versus upfront cash equity injections), and (2) SCTY’s $2.71/W in reported
C4Q15 cost is likely artificially low due to SG&A that was delayed into C1Q16 – we remind our readers that
SCTY originally guided C4Q15 GAAP OPEX to $245mn to $260mn (or $252.5mn at the mid-point), but
ultimately reported $227mn, with S&M well below our estimates (Exhibit 1); while we contend this optically
helped their cost structure look good in C4Q15, we believe the company is now having to reverse these cuts,
likely pushing costs the wrong way in C1Q16.

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 2 of 14

SolarCity Corp.
May 4, 2016

Exhibit 1: SCTY Guidance 4Q15 and 2016
Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

Source: SCTY C3Q15 Earnings Presentation – Page 10, Axiom Capital research.

Valuing the PowerCo. To value the PowerCo, using the JHF as the basis, we note the following assumptions
(in no
particular order) – see
Exhibit 6 below for buildout:
Polysilicon
Ingot/Wafer
Cells
100
Module 400
System 5,000
~

>40 play ers

~50 pla yers

play ers

~

play ers

>

pla yers

SCTY has virtually no net-operating-loss-carryforwards (“NOLs”), implying the need to factor in some tax
liability (in Exhibit 6 below, we show the impact with a 35% tax rate and without);

101mn in shares are outstanding;

There are up to $150mn in Silevo earn-out payments due;

The residential/commercial split is 73%/27%;

SCTY’s total current installed base is 1,670MW (or 1,847MW – 177MW in MyPower loans);

$1.5bn in recourse debt outstanding;

$1.2bn in non-recourse debt outstanding;

$150mn in Silevo earn-out payments due;

$394mn in restricted cash;

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 3 of 14

SolarCity Corp.
May 4, 2016

$251mn book value for MyPower loans (we assume the book value of MyPower as a credit in our valuation
framework – we do not believe SCTY can sell these assets under similar economics as those sold in the
JHF transaction as there is no associated tax equity [the math is much different]); and

$540mn in full renewal value – $782M was the unlevered retained value as of C4Q15 for the renewal
period; thus, we change the discount rate impact from 6% to 8% (using a real DCF, not their numbers and
not just taking 8% over 6% which is 33%), which is 31%; thus, the unlevered retained value at 8% comes to
$540 million untaxed, or $5.3/share.

Summary. When adding it all up, the full value of SCTY’s PowerCo today, using yesterday’s JHF deal as a
precedent, is $111mn (or $1.10/share) excluding taxes, or $72mn (or $0.71/share) including taxes. Under this
backdrop, we remind our readers that when we first initiated coverage on SCTY 10/19/15, we were valuing the
company’s PowerCo and DevCo at $14/share and $9.9/share, respectively, versus our current approach of
valuing the company using a peer group of specialty financial companies. In this fashion, as the lion’s share of
our peers begin to look at the value of this deal using just the cash equity portion – if SCTY had received full
proceeds the company would have reported $3.00/W × 201MW, or $603mn, but that's not the case, and thus
proceeds of $227mn were reported – we believe the lack of value in the PowerCo, and by default DevCo, will
begin to crystalize in the way the Street views the longer-term valuation for this company.
The Ugly – Looking at this from the Most Simplistic of Viewpoints, it Appears SCTY Sold these Cash
Flows at a Loss. While SCTY provides a bevy of financial definitions, some of which we believe continue to
confound our peers on the Street (i.e., tax equity, and its use as a form of upfront cash) as was the case with
SUNE, in the most simplistic way we know how, we attempt to show readers in this section a back-of-theenvelope approach to figuring out if SCTY made money on the deal with JHF, or lost money. That is, taking
SCTY’s most recently reported cost/W of $2.71 (Exhibit 7) - $1.38/W in tax equity (Exhibit 8) - $0.07/W in
rebates/repayments (Exhibit 9), one can calculate SCTY’s funding needs of $1.25/W. Yet, with cash equity
proceeds from the sale of 201MW of project cash flows to JHF for just $1.18/W, in the most simplistic of terms,
SCTY sold the portfolio to JHF at a loss.
Conclusion. Overall, yesterday, for all intents and purposes, SCTY got an investment from JHF – it was not a
project sale. SCTY retained ownership but, sold off 95% of their cash flows. In our view, what Consensus
appears to have missed in all of this, in addition to the fact that the tax-equity cash flows are not available for
immediate redeployment for growth/debt pay down, is that SCTY sold the cash flows, but kept the debt (this is
not sustainable). While SCTY could indeed use the proceeds from the sale to reduce their growing debt
obligation, they are likely going to use them to grow their installed base.
Stepping back, we ask our readers… would you do this? That is, would you ramp up leverage, in return for
growth, at the expense of negative free cash flows? We don’t think so as it is value destructive (no matter what
SCTY says), and is being done, we believe, to show investors growth at any cost (and, as this deal shows, it is
costing dearly). As this becomes more broadly understood, we expect the shares to come under intense
pressure.

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 4 of 14

SolarCity Corp.
May 4, 2016

Updated estimates? Based on our updated model, in which we give credit to SCTY for total solar installations
of 1.10GW in 2016, versus guidance of 1.25GW, our 2016 revenue/adjusted EPS estimates adjust to
$665.4mn/-$9.79, from $850.6mn/-$7.30 previously (Consensus estimates of $618.1mn/-$9.13). In addition, we
introduce our 2017 revenue/adjusted EPS estimates, on 1.08GW of total solar installations, of $870.2mn/-$8.77
(Consensus estimates of $942.6mn/-$8.60). Of note, SCTY recently shelved its MyPower loan product and
concurrently confirmed that MyPower will be replaced with another, more superior loan product, yet this product
has not been unveiled; for this reason, our model assumes a greater reliance on leases. See Exhibit 10 below
for our SCTY consolidated pro forma statement of operations.
Valuation. As we see it, at its core, SCTY is an originator/aggregator and servicer of residential solar leases
and PPAs, or a middle man, if you will, in providing homeowners with “solar loans”, allowing consumers, who
otherwise couldn’t afford it, the benefits of having a solar system installed on the rooftop (i.e., lower immediate
energy costs, due mainly to government incentives [i.e., investment tax credit (“ITC”)] and favorable caveats
[i.e., net metering]). By this thinking, we would go so far as to postulate that SCTY is more of a “bank” than a
solar company. However, unlike a bank, which benefits when rates go up by issuing more loans at higher rates,
should SCTY attempt to raise its rates to customers, customer spreads would shrink, materially tarnishing
SCTY’s value proposition – stated differently, we view SCTY as a de facto bank, with all the risks, but none of
the benefits.
In this fashion, as investors move to valuing SCTY as a specialty finance company, which we expect to define
2016, versus what many have historically seen as a high-growth solar vendor, we expect its valuation to move
closer to that of its specialty finance (mortgage) peers.
Thus, looking to Exhibit 2 below, observing SCTY’s specialty finance/mortgage peer group average P/B
multiple of about 0.9x (unchanged from our prior note), which is notably skewed higher by SolarCity’s multiple,
we believe the company’s fair value at present is $7/share (74% downside from yesterday’s closing price),
unchanged from our prior valuation.
Exhibit 2: SCTY P/B Build vs. Specialty Finance (Mortgage) Vendors
Polysilicon
>40 play ers

Ingot/Wafer

Cells

~

Price ($)
$26.45
$16.91
$2.09
$13.17
$12.21
$5.60
$5.26

~100

50 pla yers
play ers
SolarCity
Ellington Financial LLC
Ocwen Fincl. Corp.
PennyMac Mortgage Invst. Trust
PHH Corp.
Stonegate Mortgage Corp.
Walter Investment Mgmt. Corp.
Average

BV/Shr
P/B
Module 400
$8.53 play ers 3.1x
$22.10
0.8x
$5.95
0.4x
$20.28
0.6x
$23.96
0.5x
$10.14
0.6x
$17.74
0.3x
$15.80
0.9x
~

System > 5,000
pla yers

Note: Averages include SCTY.
Source: Company documents, Axiom Capital research.

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Axiomcapital.com

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

DO NOT FORWARD (please help us protect your edge)

Page 5 of 14

SolarCity Corp.
May 4, 2016

Exhibit 3: Recent Stock Performance – Solar
Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Peer Group

Company
MODULE/CELL VENDORS
JASO
JA Solar Holdings Co Ltd
TSL
Trina Solar Ltd
YGE
Yingli Green Energy Holding Co
JKS
JinkoSolar Holding Co Ltd
CSIQ
Canadian Solar Inc
CSUN
China Sunergy Co Ltd
HQCL
Hanwha Q CELLS Co Ltd
SCTY
SolarCity Corp
FSLR
First Solar Inc
SPWR
SunPower Corp
3576 TT*
Neo Solar Power Corp
6244 TT*
Motech Industries Inc
3514 TT*
Gintech Energy Corp
3452 TT*
E-Ton Solar Tech Co Ltd
Subgroup: Value-Wgtd Avg
Covered Companies' Equal-Wgtd Avg
PV EQUIPMENT VENDORS
MBTN*
Meyer Burger Technology AG
ASYS
Amtech Systems Inc
Subgroup: Value-Wgtd Avg
Covered Companies' Equal-Wgtd Avg
POLYSILICON VENDORS
3800 HK*
GCL-Poly Energy Holdings Ltd
WCH*
Wacker Chemie AG
DQ
Daqo New Energy Corp
REC*
REC Silicon ASA
010060 KS*
OCI Co Ltd
SOL
ReneSola Ltd
5483 TT*
Sino-American Silicon Products
600089 CH* TBEA Co Ltd
Subgroup: Value-Wgtd Avg
Covered Companies' Equal-Wgtd Avg
S&P 500**

Share Price
Cells

Market Cap

Performance (%)

Module ~ 400

~100
play ers

System > 5,000

Axiom
Rating

5/3/2016

($MM)

1Day

1Mo

3Mo

YTD

6Mo

1YR

Sell
Sell
Sell
NC
NC
NC
NC
Sell
NC
NC
Hold
NC
NC
NC

$ 8.40
$ 9.01
$ 3.07
$ 21.04
$ 16.57
$ 0.21
$ 12.52
$ 26.45
$ 52.85
$ 18.33
$ 0.53
$ 0.98
$ 0.71
$0.31

$400
$833
$56
$660
$952
$3
$1,052
$2,600
$5,404
$2,507
$539
$530
$317
$241

-1.9%
-5.0%
-14.7%
-6.1%
-5.4%
0.0%
-0.6%
-10.5%
-3.6%
-5.6%
-1.2%
4.3%
3.6%
-0.5%
-4.6%
-6.6%

-2.8%
-9.2%
-33.3%
4.2%
-12.8%
-23.6%
-16.7%
8.9%
-21.7%
-18.5%
-16.6%
-13.0%
-9.2%
-9.9%
-12.4%
-10.6%

-3.8%
-5.1%
-31.5%
6.4%
-13.7%
-73.6%
-26.4%
-15.7%
-20.5%
-26.3%
-16.5%
-17.2%
-24.6%
-11.5%
-18.1%
-14.5%

-13.4%
-18.2%
-32.2%
-24.0%
-42.8%
-80.9%
-42.9%
-48.2%
-19.9%
-38.9%
-27.3%
-29.0%
-28.9%
-19.4%
-31.0%
-27.9%

-3.9%
-14.4%
-59.0%
-21.6%
-28.7%
-83.1%
-29.6%
-12.3%
-9.4%
-33.3%
-20.3%
-28.6%
-8.1%
-20.0%
-18.0%
-22.0%

-18.8%
-27.9%
-83.8%
-26.9%
-54.3%
-88.6%
-48.3%
-57.1%
-7.8%
-42.8%
-35.1%
-18.5%
18.8%
-38.1%
-30.2%
-44.5%

Buy
NC

$4.07
$5.65

$369
$74

-7.4%
-6.8%
-7.3%
-7.4%

6.6%
-7.5%
4.2%
6.6%

-29.5% -35.0% -45.1% -39.6%
3.9%
-9.7%
6.8% -54.5%
-23.9% -30.8% -36.4% -42.1%
-29.5% -35.0% -45.1% -39.6%

Sell
NC
NC
NC
NC
NC
NC
NC

$0.15
$97.56
$24.69
$0.22
$107.02
$1.26
$1.09
$1.38

$2,706
$5,088
$258
$561
$2,552
$128
$634
$4,469

$2,063

$17,829,058

play ers

pla yers

-2.6% -11.7% 10.8% -2.6% -28.9% -47.9%
0.9% 10.7% 40.3% 9.2%
2.3% -24.3%
0.1% 32.7% 56.1% 48.3% 51.1% -9.0%
1.9% 28.7% 51.3% -0.4% 19.1% -15.4%
6.5% 21.8% 78.3% 64.0% 44.2% 21.8%
-3.8% -10.6% -12.5% -25.9% -10.0% -25.4%
2.8% -1.1% -12.9% -24.4% -13.5% -17.4%
2.5% -1.7%
2.8% -24.0% -26.3% -50.3%
1.7%
5.7% 29.2% 5.4% -3.5% -27.3%
-2.6% -11.7% 10.8% -2.6% -28.9% -47.9%
-0.9% -0.5% 7.9%
1.0% -2.2% -2.1%

Note: Subgroup averages are weighted based on current market cap; stocks under our coverage are averaged using an equal-weighting.
Note: (*) For comparison, non-US share prices and market caps are converted to USD.
Note: (**) The benchmark S&P 500 market is based on free-floating shares.
Source: Company data, Bloomberg Consensus estimates, Axiom Capital Research.

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Axiomcapital.com

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

DO NOT FORWARD (please help us protect your edge)

Page 6 of 14

SolarCity Corp.
May 4, 2016

Exhibit 4: SCTY Installation Guidance for 1Q16 and 2016
Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

Source: Page 12 of SCTY C4Q15 Earnings Presentation.

Exhibit 5: Required Funding to Meet SCTY’s 2016 Installation Guidance
Polysilicon
>40 play ers

Polysilicon
>40 play ers

Ingot/Wafer
~50 pla yers

Ingot/W
afer
1

~50 pla yers
Installations (MW)
Dev costs ($/watt)
Tax equity ($/watt)
Net dev costs
Total costs ($MM)
Secured debt financing ($MM)2
Cash equity required ($MM)

1Q16
180
$2.66
$1.66
$1.00
$180.2
$180.2
$0.0

Cells

~100
play ers
~100
play ers

Cells

2Q16
357
$2.61
$1.66
$0.95
$338.4
$69.8
$268.7

3Q16
357
$2.55
$1.66
$0.90
$319.7
$0.0
$319.7

Module ~ 400

4Q16
play
357ers
$2.50
$1.66
$0.84
$301.0
$0.0
$301.0
play ers

Module ~ 400

2016
1,250
$2.57
$1.66
$0.91
$1,139.3
$250.0
$889.3

System > 5,000
pla yers

System > 5,000
pla yers

Note: (1) SCTY has guided 180MW in 1Q16 installations; we assume linear installations for the remainder.
Note: (2) SCTY has raised ~$250mn from its latest ABS issuance and MyPower loans for 1Q16 installations; we apply this to 1Q/2Q16 installations.
Note: We assume a linear decrease in SCTY's development costs during 2016, from a reported $2.71/watt exiting 2015 to $2.50/watt exiting 2016.
Note: Tax equity is estimated from SCTY's 4Q15 financials and assumed to carry unchanged.
Source: Company data, Axiom Capital research.

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Axiomcapital.com

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

DO NOT FORWARD (please help us protect your edge)

Page 7 of 14

SolarCity Corp.
May 4, 2016

Exhibit 6: John Hancock Cash Equity Sale Implications for SCTY PowerCo Value
Polysilicon
>40 play ers

Total Portfolio
Ingot/Wafer
Profit
~50 pla yers
MWs Sold
Profit per MW
% Sold
Profit per MW - Adjusted
Less: SREC Benefit on Mix (forecast)
Profit per MW - Adjusted for SREC's

5/2/2016
Cells

~100
play ers

Module
~ 400
$227
play ers

201
$1.13
0.95
$1.19
$0.06
$1.13

% Breakout
Residential
Commercial

73.0%
27.0%

Profit per MW Breakout %
Residential $/watt
Commercial
Blended
Check

$1.20
$0.95
$1.13
$0.00

Total PowerCo Portfolio Size
Installed Base¹

C4Q15
1,670

Residential MW
Residential $/watt²
Value

1,219
$1.15
$1,402

Commercial MW
Commercial $/watt
Value

451
$0.95
$428

Total MW
Total Value
Taxes
Total Value After Taxes
Less: Recourse Debt
Less: Silevo Earn Out
Plus: Unrestricted Cash
Plus: Book Value of MyPower
Total Value
Shares

1,670
$1,830
$0
$1,830
$1,512
$150
$394
$251
$813
101

Total Value Before Non-Recourse Debt
Total Value
Total Value/Share
Less: Non-Recourse Debt
Less: Non-Recourse Debt/Share

System > 5,000
pla yers

5/2/2016
$813
$8.05
$1,242
$12.3

Plus: Full Renewal Value - 8%³
Plus: Full Renewal Value - 8%/Share

$540
$5.3

Total Value Incl. Non-Recourse Debt & Renewal Value
Total Value Incl. Non-Recourse Debt & Renewal Value/Share
Total Value Incl. Non-Recourse Debt & Renewal Value (Taxed) 4
Total Value Incl. Non-Recourse Debt & Renewal Value/Share (Taxed)

$111
$1.10
$72
$0.71

¹ Installed base is calculated by taking deployed MWs less 177MW in MyPower loans (we include a book value for MyPower as a credit, but exclude it from the
deployed base as we don't think they can sell these under the same economics – there is no tax equity, thus the math is different.
² We adjust the residential value slightly lower to reflect the fact that we are applying a value to the entire portfolio, yet don’t know where interest rates are
going (SCTY talked about a 4.5% blended cost of debt 4 months ago – rates have barely moved – and now SCTY's cost of debt is much higher… if rates go
up, the ASP will go down), or if its even possible to sell the entire portolio given counterparties.
³ $782M was the unlevered retained value as of C4Q15 for the renewal period; thus, we change the discount rate impact from 6% to 8% (using a real DCF, not
their numbers and not just taking 8% over 6% which is 33%), which is 31%; thus, the unlevered retained value at 8% comes to $540 million untaxed, or
$5.3/share.
4
We assume a 35% tax rate.
Source: Company documents, Axiom Capital research.

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 8 of 14

SolarCity Corp.
May 4, 2016

Exhibit 7: SCTY Cost/W Exiting 2015
Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

Source: Page 3 of SCTY C4Q15 Earnings Presentation.

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Axiomcapital.com

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

DO NOT FORWARD (please help us protect your edge)

Page 9 of 14

SolarCity Corp.
May 4, 2016

Exhibit 8: SCTY Tax Equity Exiting 2015
Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

Source: Page 2 of SCTY C4Q15 Asset Financing Supplemental.

Exhibit 9: SCTY Rebates/Re-Payments Exiting 2015
Polysilicon
>40 play ers

Ingot/Wafer
~50 pla yers

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Cells

~100
play ers
~100
play ers

Cells

Module ~ 400
play ers

System > 5,000
pla yers

Module ~ 400

System > 5,000

play ers

pla yers

Source: Page 4 of SCTY C4Q15 Asset Financing Supplemental.

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Axiomcapital.com

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

DO NOT FORWARD (please help us protect your edge)

Page 10 of 14

SolarCity Corp.
May 4, 2016

Exhibit 10: SCTY’s Consolidated Statement of Operations – Axiom Capital Estimates 2016-2017
Q1
$54.8
$12.7
$67.5
-6%
6%

Fiscal 2015
Cells ~100
Q2
Q3
Q4
Q1E
play ers
$78.3
$85.1
$75.4
$81.2
$24.5
$28.8
$40.1
$49.9
$102.8
$113.9
$115.5
$131.1
52%
11%
1%
14%
68%
95%
61%
94%

Fiscal 2016E
Module ~ 400
Q2E
Q3E
Q4E
play ers
$123.7
$136.6
$115.1
$52.9
$54.6
$51.4
$176.6
$191.2
$166.5
35%
8%
-13%
72%
68%
44%

Q1E
$129.1
$41.9
$171.1
3%
30%

Fiscal 2017E
System > 5,000
Q2E
Q3E
Q4E
pla yers
$193.8
$210.2
$171.0
$42.7
$42.4
$39.2
$236.5
$252.5
$210.1
38%
7%
-17%
34%
32%
26%

Operating leases and solar energy systems incentives
Solar energy systems and component sales
Total cost of revenue

$32.3
$13.5
$45.7

$37.4
$22.1
$59.5

$46.0
$42.6
$88.6

$49.9
$37.1
$87.0

$53.9
$46.3
$100.2

$60.4
$47.6
$108.0

$66.8
$48.2
$115.0

$74.4
$46.3
$120.7

$79.9
$42.2
$122.1

$86.1
$41.5
$127.6

$92.0
$42.2
$134.2

$99.2
$40.1
$139.3

Gross profit

$21.8

$43.3

$25.3

$28.5

$30.9

$68.6

$76.2

$45.8

$48.9

$108.9

$118.4

$70.9

Sales and marketing
General and administrative
Research and development
Total operating expenses

$86.7
$48.7
$12.1
$147.4

$113.2
$50.2
$12.4
$175.8

$129.3
$69.4
$17.7
$216.4

$128.1
$76.2
$22.8
$227.0

$142.5
$65.5
$24.9
$232.9

$132.6
$96.9
$26.5
$256.0

$126.3
$95.1
$28.7
$250.1

$120.7
$102.8
$25.0
$248.6

$125.9
$76.3
$25.7
$227.9

$102.3
$87.1
$35.5
$224.9

$125.1
$84.4
$37.9
$247.4

$114.9
$98.2
$31.5
$244.6

Operating profit (loss), EBIT
EBITDA

($125.7)
($89.3)

($132.4)
($94.4)

($191.1)
($147.4)

($198.6)
($150.0)

($202.0)
($149.8)

($187.4)
($129.1)

($173.9)
($109.8)

($202.7)
($131.8)

($178.9)
($103.5)

($116.0)
($35.2)

($129.1)
($43.0)

($173.7)
($81.2)

$18.5
$2.1
$20.6

$20.5
$2.8
$23.3

$25.9
$16.9
$42.7

$27.1
$4.0
$31.1

$34.6
$4.0
$38.6

$38.2
$4.0
$42.3

$43.4
$4.0
$47.5

$48.9
$4.0
$53.0

$52.9
$4.0
$56.9

$56.1
$4.0
$60.1

$60.6
$4.0
$64.6

$65.6
$4.0
$69.6

Pretax income (loss), EBT

($146.3)

($155.7)

($233.8)

($229.7)

($240.6)

($229.6)

($221.3)

($255.7)

($235.9)

($176.1)

($193.7)

($243.3)

Income tax benefit (provision)
Consolidated net income (loss)
Less: Profit (loss) attributable to non-controlling interests
Net income (loss)

($0.6)
($146.9)
($125.4)
($21.5)

($0.0)
($155.7)
($133.4)
($22.4)

($0.5)
($234.3)
($215.2)
($19.1)

($2.2)
($231.9)
($236.5)
$4.6

($2.3)
($242.9)
($218.6)
($24.3)

($2.2)
($231.8)
($204.0)
($27.8)

($2.1)
($223.5)
($196.6)
($26.8)

($2.4)
($258.1)
($227.1)
($31.0)

($2.3)
($238.1)
($209.5)
($28.6)

($1.7)
($177.8)
($156.5)
($21.4)

($1.9)
($195.5)
($172.1)
($23.5)

($2.3)
($245.6)
($216.1)
($29.5)

Basic earnings per share (EPS)
Diluted earnings per share (EPS)
Non-GAAP EPS (diluted) -- consolidated
Basic weighted shares outstanding
Diluted weighted shares outstanding

($0.22)
($0.22)
($1.52)
96.7
96.7

($0.23)
($0.23)
($1.61)
97.0
97.0

($0.20)
($0.20)
($2.41)
97.4
97.4

$0.05
$0.04
($2.25)
97.7
102.9

($0.25)
($0.25)
($2.49)
97.7
97.7

($0.28)
($0.28)
($2.37)
97.7
97.7

($0.27)
($0.27)
($2.29)
97.7
97.7

($0.32)
($0.32)
($2.64)
97.7
97.7

($0.29)
($0.29)
($2.44)
97.7
97.7

($0.22)
($0.22)
($1.82)
97.7
97.7

($0.24)
($0.24)
($2.00)
97.7
97.7

($0.30)
($0.30)
($2.51)
97.7
97.7

Polysilicon

Ingot/Wafer

Fiscal Year-End:
December
>40 play ers
~50
Operating leases and solar energy systems incentives
Solar energy systems and component sales
Total revenue
% Change Q/Q
% Change Y/Y

pla yers

Interest expense, net
Other expense, net
Non-operating expenses (income) , net

Source: Company data, Axiom Capital Research.

Polysilicon

Ingot/Wafer

>40 play ers

~50 pla yers

Axiomcapital.com

Cells

~100
play ers

Module ~ 400

System > 5,000

play ers

pla yers

DO NOT FORWARD (please help us protect your edge)

Page 11 of 14

SolarCity Corp.
May 4, 2016

Risks to Downside Price Target
While we have strong confidence in our views expressed throughout this report, we do acknowledge a number
of risks to our downside 2016 year-end price target. Below, we provide some perspective on these risks.

Net-Metering Prevails. Core to our thesis is our view that utilities are readily gaining ground against the
whole net-metering argument (i.e., whether customers with solar systems should be excluded from fixed
charges on their utility bills) and will likely eventually prevail. If, however, solar proponents somehow are
able to get everything they want, and the states currently reviewing net-metering policies either maintain or
even strengthen the status quo, our thesis would prove invalid.

Interest Rates Stay Lower for Longer. As we see it, low interest rates enable the beneficially low cost of
capital in SCTY’s solar loans. While higher interest rates would benefit traditional financial intermediaries,
which generate the preponderance of earnings based on where net interest levels are floating, we posit that
SCTY cannot simply pass on higher interest to its customers, as this would erode the costs savings of
installing rooftop solar. However, if the Federal Reserve indefinitely continues to refrain from raising interest
rates, SCTY would be saved from this inevitability, which runs contrary to our long-term thesis.

Financial Engineering...a Sentiment Play. As we have stated countless times before, we view SolarCity
as a specialty finance / leasing company, versus a solar company. We say this given the complex products
that SCTY offers and difficulty in modeling the company with any degree of precision. In other words, due to
the plethora of assumptions that are required to model SCTY, we see this stock driven more by sentiment,
versus fundamentals. Resultantly, following a similar “craze” that surrounded YieldCo.s last year, we
acknowledge that SCTY’s stock may go higher if the company can reinvigorate investor sentiment by rolling
out new, unforeseen financing products or engaging in more aggressive securitizations of its receivables.
While this is a risk that would certainly void our thesis, we believe it would itself be temporary.

High Short Interest and Inside Ownership. Given the high degree of SCTY’s shares already sold short,
we acknowledge that a potential short squeeze could result in a big move higher in the stock. Moreover,
downside to SCTY’s share price could be limited by a lack of selling when considering the high amount of
inside ownership.

Please contact your Axiom Capital Research sales person for our dynamic SCTY company model.

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 12 of 14

SolarCity Corp.
May 4, 2016

Analyst Certification:
I, Gordon Johnson, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer.
Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this
research report.
Explanation of Ratings
Outperform/Buy – We expect the stock to outperform the S&P 500 Index and post absolute price appreciation of at least 10%.
Neutral/Hold – We expect the stock to perform in line with the S&P 500 Index.
Underperform/Sell – We expect the stock to underperform the S&P 500 Index and post absolute price depreciation of at least 10%
Current distribution of ratings as of May 4, 2016
Rating

Number

%

Outperform/Buy

14

40%

Neutral/Hold

6

17%

Underperform/Sell

15

43%

Investment banking services were not provided to any of the companies with the aforementioned ratings. All current required disclosures are available
rd
by contacting: Compliance Department at 780 Third Avenue, 43 Floor, New York, NY 10017
Valuation Methods for Fundamental Analysis
One or more of the following valuation methods are used in making a price projection: Analysis of the supply and demand for a security to ascertain
how high or low a stock price may move before either overhead supply or underneath demand develops; Analysis of a company’s P/E ratio, price/book
ratio, price/cash ratio, earnings expectations or sales growth as they relate within an industry group or to the broader market; Dividend yield of the S&P
500 vs. the yield of the 10-year government bond; Individual sector analysis along with investor sentiment, and Federal Monetary Policy.
Valuation Methods for Technical Analysis
Valuations are based on technical analysis techniques using some or all of the following inputs: trend recognition, pattern recognition, Japanese
candlestick formations, oscillator readings (short-term), relative performance, money flows, support and resistance levels, volume, sentiment indicators,
and seasonal analysis.
This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentioned herein. This publication is confidential and for
the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without the prior
written consent of Axiom Capital Management, Inc.
This material has been prepared by Axiom Capital Management, Inc., a registered U.S. broker-dealer, employing appropriate expertise, and in the belief
that it is fair and not misleading. Axiom Capital Management, Inc. accepts no liability for loss arising from the use of the material presented in this
report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to
Axiom Capital Management, Inc. This report is not to be relied upon in substitution for the exercise of independent judgment. Axiom Capital
Management, Inc. may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the
information presented in this report. Those reports reflect the different assumptions, views, and analytical methods of the analysts who prepared them
and Axiom Capital Management, Inc. is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 13 of 14

SolarCity Corp.
May 4, 2016

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is
made regarding future performance. Information, opinions, and estimates contained in this report reflect a judgment at its original date of publication
by Axiom Capital Management, Inc. and are subject to change without notice. The price, value of, and income from any of the securities mentioned in
this report can fall as well as rise. The value of securities is subject to exchange rate fluctuations that may have a positive or adverse effect on the price
or income of such securities. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk.
Securities recommended, offered, or sold by Axiom Capital Management, Inc.: (1) are not insured by the Federal Deposit Insurance Corporation; (2) are
not deposits or other obligations of any insured depository institution; and (3) are subject to investment risks, including the possible loss of principal
invested. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances; you
may be required to pay more money to support these losses.
We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal
in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to this research.
ADDITIONAL DISCLOSURES
The analyst or a member of the analyst’s family holds a stock or options position in the following securities mentioned in this report: None.
Options Disclosures
Options are not suitable for all investors and not all options strategies are suitable for all investors who may be suitable to trade options. At or prior to
being approved for options trading, investors must be given and should read “Characteristics and Risks of Standardized Options,” the risk disclosure
booklet issued by the options exchanges. All accounts must meet options suitability requirements prior to any options trading. Options strategies may
entail significant risks. Certain strategies may contain risks beyond the initial investment and cause the investor to incur losses beyond such investment.
Risks associated with the strategies contained herein are included in the discussions on breakeven point, maximum risk and maximum loss discussions,
to the extent applicable. Annualized returns cited in this report may be achieved only if the parameters described can be duplicated and there is no
certainty of doing so.
Axiom Capital Management, Inc. previously provided to you a copy of the booklet entitled “Characteristics and Risks of Standardized Options.” A current
rd
copy of this booklet may be obtained by calling Eric Miller or by sending a written request to: Axiom Capital Management, Inc. at 780 Third Avenue, 43
Floor, New York, NY 10017.

Axiomcapital.com

DO NOT FORWARD (please help us protect your edge)

Page 14 of 14