Time To Sell SolarCity, Gordon Johnson Warns

• SolarCity Corp SCTY shares have been highly volatile since January and are down 18 percent year-to-date.
• Axiom Capital’s Gordon Johnson initiated coverage of the company with a Sell rating and a price target of $24.
• Utilities appear to be better placed to win the net metering battle, Gordon said, while adding that there is outsized risk to SolarCity’s valuation.

Analyst Gordon Johnson mentioned that SolarCity is not really a solar company. Instead, it is a leasing company and its value proposition is almost entirely depends on:

1. “de minimis changes to net-metering (“NM”) policies – solar users foregoing transmission/distribution charges”
2. Borrowing costs continuing to be low
3. Defaults on its 20-year contracts being minimal
4. Minimal financial penalties from the ongoing US Treasury Department’s investigation into “alleged overstatements of retained value (“RV”) to obtain tax-payer incentives”
5. Modules from the company’s GigaFab being able to outdo the competition

Johnson added, however, that there is “outsized risk” to SolarCity’s valuation due to:

1. Utilities are “increasingly winning the NM fight” – The NC Clean Energy Tech. Center’s 2Q15 study indicates that 18 states out of the 44 that employ NM have proposed changes adverse to SolarCity
2. The starting of a series of class-action lawsuits centered on “deceptive solar lending practices”
3. The company’s shift away from using RV to showcase its worth to investors
4. SolarCity’s target of reaching module production cost/efficiency of 50c-per-W/20 percent by 2017, as compared to Chinese producers at 40c-per-W/19 percent

“In fact, SCTY’s CEO actually seems to agree with us,” Johnson wrote, pointing out that since 11/8/13, SolarCity’s CEO had sold shares worth $54 million, as compared to $3.8 million by the CEO of First Solar, Inc. FSLR and $23.9 million by the CEO of SunPower Corporation SPWR, while the CEO of Sunedison Inc SUNE purchased shares worth $868 million during the same period.