IPO Alert: Should SolarCity (SCTY) Fill Your Holiday Stocking?

| December 7, 2012 | 0 Comments

It’s that time of year again…

In just a few short weeks, Jolly Ole’ St. Nick will be sliding down the chimney bearing gifts of all shapes and sizes.

Speaking of bearing gifts, renewable energy investors are hoping a highly anticipated initial public offering (IPO) will bear big gains for their portfolio.

California based solar installer, SolarCity (SCTY) makes its trading debut December 12th on the Nasdaq exchange.  Judging by the company’s convincing roadshow presentation, investor hopes are high for this next-generation energy company.

What exactly does SolarCity do?

The company, backed by big investors including Credit Suisse (CS), US Bancorp (USB), and Google (GOOG), is the leading solar panel installer in the US.

After a convincing in-home consultation (I know because I’ve been through one), SolarCity signs an outright purchase or long-term lease agreement with the buyer.  A few months later, the customer’s rooftop is filled with clean-energy producing solar panels.

At first glance, this may not sound like such a great business model.  After all, not many people are willing to fork over the big bucks required to install a solar system… right?

Not so fast

Take one look at SolarCity’s surging revenues and you’ll find business is booming.

In fact, revenues grew from $32 million in 2009 to just over $59 million in 2011… an 85% jump!

And listen to this…

In the first nine months of 2012, the company has already tallied revenues of $103 million!

If sales continue at the current pace, revenues will easily double over 2011.  Clearly, SolarCity is experiencing remarkable growth.

And believe it or not, the company’s surging popularity makes perfect sense…

You see, SolarCity’s revolutionary lease program makes it painless for consumers to switch to clean and green solar energy.  Their 20-year lease requires no upfront costs and typically lowers a customer’s utility bill by 20% or more.

Sounds pretty good right?

Well, yeah.  As a matter of fact, it’s a great deal for consumers.  Anyone looking to lower their utility bills and feel good about getting energy from renewable resources should take a closer look at SolarCity.

However, as far as the upcoming IPO is concerned, potential investors should make sure they read the prospectus carefully…

SolarCity is highly dependent on state/federal government incentives and rebates to support their bottom line.  As you may have guessed, how much governments are willing to spend on renewable energy going forward is shady at best.

And that’s not all…

Dig a little deeper and you’ll find losses are mounting for SolarCity.  In fact, the company reported a $73 million net loss in 2011- 56% worse than in 2010.  Remember, that’s the same year revenues grew by 85%.

And the red ink is spilling over into 2012…

The company reported a net loss of $77.9 million for the first nine months of this year.  At that rate, SolarCity’s losses will easily surpass $100 million for full-year 2012.

Now, to be fair, SolarCity is a fairly new company that’s still in rapid growth mode.  And that means management is investing heavily in new employees, property, and buildings.

But considering the company’s worsening earnings situation, potential investors should think twice about buying into the SolarCity IPO.

The most likely scenario on SolarCity’s first few months of trading is a quick post-IPO pop and then painful grind lower as investors wait for the company’s bottom line performance to improve.

It’s simple folks…

Santa’s coming soon, but unless you like coal in your stocking, I would steer clear of SolarCity.

Until Next Time,

Justin Bennett

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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