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How SolarCity can win the market back

“What exactly is the business model of SolarCity?”

That question wouldn’t be surprising if it came from your average Joe. But when it comes during a quarterly earnings call from Krish Sankar, an analyst who follows SolarCity for Bank of America Merrill Lynch, it shows just how fuzzy Wall Street has become over the solar energy installer that was once one of its darlings.

Sankar’s question came after SolarCity scaled back its forecast for installations for the third time in seven months, slashing its growth outlook from more than 80 percent last summer, to 44 percent last fall and now around 20 percent.

It came after SolarCity’s costs remained stubbornly high during the first quarter, actually rising at a time when the company is making a concerted effort to reduce them.

It came as SolarCity’s new order bookings – an essential precursor for its growth plans – sagged by 50 percent in the first quarter and were expected to be flat during the spring.

It came as analysts complained that the company’s finances have become too complicated and too hard to understand, even for professionals like themselves.

“Wall Street thinks this is way too complicated,” said Ben Kallo, an analyst at Robert Baird & Co. “Maybe it’s time to get back to brass tacks.”

But SolarCity has an even bigger problem than being hard to understand. After repeatedly failing to meet its growth targets, Wall Street simply isn’t willing to take SolarCity at its word anymore.

“Management has ruined its credibility for now,” Kallo wrote in a report following the conference call.

Kallo wasn’t alone.

“SolarCity will need to regain investor confidence by executing on their plan, reducing their cost structure and achieving 2016 guidance,” wrote Patrick Jobin, a CreditSuisse analyst who slashed his price target for the stock to $38 from $62 after the earnings report.

For a company that recently has made a habit of not living up to its promises, that’s a tall order.

And it’s why SolarCity’s once high-flying stock is now in the dumps, losing 70 percent of its value since mid-December, including a 20 percent plunge on Tuesday – to $17.82 – after its disappointing earnings report rattled investors yet again.

All of that is concerning for the Buffalo Niagara region, because the state is making a $750 million bet on SolarCity as one of the centerpieces of Gov. Andrew M. Cuomo’s Buffalo Billion economic development initiative.

The 1.2 million-square-foot factory that the state is building and outfitting for SolarCity will be the biggest in the Western Hemisphere, and if everything goes as planned, one of the region’s biggest employers, with 1,460 jobs at the factory and another 1,440 at its suppliers and service providers.

So in some ways, as SolarCity goes, so goes Buffalo Niagara.

And right now, SolarCity isn’t going so well.

Reasons for slowdown

Company executives tried last week to put a positive spin on their disappointing results, casting the blame on short-term factors that largely have been resolved in a way that is favorable to SolarCity’s future.

They said consumers were spooked by changes that regulators in Nevada made that reduced payments to solar system owners, even those that already have been installed. It prompted SolarCity to pull out of Nevada, one of the nation’s sunniest states.

They said uncertainty over regulations in other key states, such as California, Arizona, Massachusetts and New Hampshire initially made consumers wary about committing to solar power – until the new regulations that were put in place turned out to be relatively favorable to solar power.

They said their decision to stop offering consumers loans so they could buy the solar systems that were installed on their rooftops, rather than leasing them, shut out a group of potential customers that makes up 15 percent to 20 percent of its sales base – until SolarCity relaunched its loan product within the past two weeks.

They said a previously announced price increase in California pulled some orders into late 2015, leaving SolarCity with an order book that was largely empty heading into this year.

“These headwinds that hit us in the first quarter, they’re past now,” said Lyndon Rive, SolarCity’s CEO, during a conference call. “We now have better clarity than we’ve had in a long time.”

Rive said order bookings picked up in March and April, running about 25 percent higher than they were in January and February.

Influential skeptics

But after so many disappointments, analysts were skeptical. At least six investment firms downgraded SolarCity’s stock last week. And some analysts already are doubting that SolarCity can even meet its recently lowered growth targets.

“Bookings still need to improve to support the lower guidance,” said Stifel Research analyst Sven Eenmaa.

MorganStanley analyst Stephen C. Byrd is already doubtful that SolarCity can install the 1,000 megawatts to 1,100 megawatts of solar generating capacity that it now says it will this year. He thinks its more likely to be around 950 megawatts.

He is skeptical that SolarCity will reach its goal of generating more cash from its operations than it uses by the end of next year. Byrd thinks 2018 is more likely.

He also doubts that SolarCity’s cost-cutting efforts will go as smoothly as it predicts. He thinks the company will succeed in reaching its goal of cutting its costs, now at $3.18 per watt because of the reduced volumes in the first quarter, to its goal of $2.25 per watt. But Byrd doesn’t think it will happen until 2018, not the company’s target of 2017.

“This quarterly result highlights the important relationship between growth targets and total installation costs,” Byrd said in a report. “Should growth headwinds persist, it could present additional challenges for driving down costs per watt.”

That’s because a big part of SolarCity’s scaled-back growth plan, announced in October, was to hold the line on expenses by not going after marginal customers that were expensive to sign up. That’s fine when growing strong, but when that growth slows, bringing down SolarCity’s costs per watt becomes even more difficult as volumes decline.

In the first quarter, SolarCity spent the equivalent of 97 cents per watt to sign up customers – a whopping 73 percent increase because of the soft bookings. Rive thinks those costs are coming down in the current quarter, but it won’t be until the summer that they get back to more normal levels.

And Rive is confident that SolarCity will return to the more rapid growth that it’s seen in the past, especially now that the 30 percent federal investment tax credit has been extended and most state regulators are adopting rules that aren’t ruinous to the solar industry.

But before that happens, SolarCity will have to wait until it shores up its cash flow.

And after so many disappointments, Rive was gun-shy about predicting exactly when that might happen.

“I don’t want to forecast for 2017, but once the business starts generating cash, the goal would be to go back into growth mode again,” he said.