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SolarCity needs to dial back on its promises

SolarCity CEO Lyndon Rive learned a painful, $870 million lesson last week: On Wall Street, there’s nothing investors like less than a company that overpromises and under delivers.

Especially when that company does it over and over again.

That’s what made SolarCity’s fourth-quarter earnings announcement such a bombshell.

Sure, the company missed its growth targets during the final three months of last year, but only by about 3 percent. It still installed 870 megawatts worth of solar panels last year – 73 percent more than in 2014.

Yes, SolarCity warned that its first quarter would be weak, mainly because of its pullout from the Nevada after regulators there reduced incentives for solar energy systems. But the company said it expects to make up for that shortfall as the year plays out. It still expects to hit its growth forecast of about 43 percent in 2016.

“The solar market looks very positive,” Rive said during a conference call. “We expect to continue to grow at 40 percent and be cash flow positive in the fourth quarter.”

Yet investors mercilessly hammered SolarCity’s stock, sending the shares tumbling by 34 percent in the two days after the earnings announcement. The stock fell to its lowest point since March 2013, wiping out $870 million in shareholder value.

After the company came up short on hitting its growth forecasts during three of the last four quarters, including a radical cut in SolarCity’s outlook in October, investors were in no mood for disappointment.

“The volume miss is going to drive negative sentiment on the demand environment, despite positive indicators, and severely harm management’s credibility in guidance setting,” said Credit Suisse analyst Patrick Jobin.

Jobin summarized SolarCity’s weak fourth quarter this way in a research note: “Bottom line – negative, but house not on fire. A bad market for a modest miss.”

It sure was. SolarCity’s stock, which already had lost 48 percent of its value this year even before the earnings announcement, went into a free-fall on Wednesday. Analysts, already skeptical of the company’s forecasts, weren’t sympathetic to SolarCity’s explanation that the shortfall in solar installations was due to unexpected delays on some big East Coast commercial solar projects and its pullout from the suddenly inhospitable Nevada market.

SolarCity has a huge appetite for cash, since most of its business is built around a model that allows homeowners to install solar energy systems with no upfront costs. SolarCity fronts those costs and then collects monthly payments for the next 20 years.

But that leads to huge operating losses – $648 million last year alone. For every $1 in revenue SolarCity takes in, it spends $1.92.

To get that money back faster, SolarCity does what mortgage lenders have been doing for decades, packaging thousands of those solar IOUs into bonds that it sells to investors.

But analysts and investors also are growing more wary of how SolarCity is financing its growth The skeptics wonder whether SolarCity will be able to keep raising all the money it needs to fund its growth, especially if interest rates rise or the economy weakens.

With the federal government late last year extending the tax credit that saves homeowners and businesses 30 percent when they install a new solar array, SolarCity seemed to be in a good position for growth, especially after the company scaled back its expansion plans in October, when the ITC extension was very much up in the air. At that time, Rive said the company recognized that it needed to reduce its losses and generate more cash than it uses by the end of 2016.

“What investors got was much more disappointing, despite an ITC extension resulting in a robust long-erm outlook,” Roth Capital analyst Philip Shen said.

“The last quarter was supposed to be the ‘kitchen sink’ quarter that resulted in lowered expectations,” he said. “One quarter later, the company delivered another miss.”

SolarCity, the linchpin of Gov. Andrew M. Cuomo’s Buffalo Billion economic development initiative, plans to open a $900 million solar panel factory in Buffalo, with help from $750 million in state subsidies. The factory, which will be able to produce enough panels each year to generate 1-gigawatt of electricity, wasn’t immune to SolarCity’s shifting focus.

The plant, originally scheduled to begin production during the first quarter of 2017, now is not expected to hit that target until sometime during the summer of next year. Rive said the delay is because it will take longer than expected to deliver some of the factory’s sophisticated equipment. State officials also downplayed the delay, saying they’re not uncommon with complex projects like SolarCity’s 1.2 million square foot factory.

But the delay also will allow SolarCity to push $65 million to $70 million of its spending on the project into next year, which should help it meet its cash flow target this year. Jobin, in a research note, wondered if there was more too it.

“While we suspect this is genuinely due to equipment delivery delays, it does beg the question if there is a desire to delay the Buffalo plant startup to preserve cash near-term and provide more time for scaling the technology,” Jobin wrote.

The state, with its massive investment, has shown great faith in SolarCity. Last week, investors showed they no longer shared that faith.