Financial Statement Analysis

SolarCity Valuation Term ProjectTeam 2

May 9, 2015

Kim ButlerSen ChokkanRonnie Roth

Jerry Vorbach

2

SolarCity Corporation was founded in 2006 and is currently headquartered in San Mateo, California.

In selling, financing, and monitoring solar energy systems that convert sunlight into electricity, SolarCity is allowing clients to lower their usage of conventional electricity.

The solar panels are sold under long-term contracts with customers generally agreeing to a 20 year term.

Currently Solar City is installing one out of every four solar energy systems in the US. In 2010 they began serving the business, government and non-profit sectors, and continue to grow

SolarCity Background

3

SolarCity has completed many installation projects for exceedingly larger organizations such as Intel, Wal-Mart and the U.S. Military.

In an attempt to bolster their position within the solar industry, SolarCity acquired Silevo in 2014, a solar panel technology and manufacturing company.

The additional acquisition of Zep Solar in 2014, a company that designs mounts for solar panels, was another step in the right direction.

Recently, SolarCity came to an agreement with New York State on an incentive package to build a solar manufacturing plant capable of producing a gigawatt of panels per year.

SolarCity Background (continued)

4

“Retained value” is an estimate of how much future income from the power that SolarCity customers purchase, net of costs, is worth in today’s money.

SolarCity earned $255.03 million in revenue in 2014, a 56% increase over 2013’s $163.84 million. This increase can be attributed to their winning government and business contracts, as well as the addition of over 100,000 new residential customers.

SolarCity’s Cost of Goods Sold increased 42% from $124.46 million in 2013 to $176.43 million in 2014, along with a growth in Selling General and Administrative expense from $187.22 million in 2013 to $395.03 in 2014, which shows that the company remains unprofitable with a 2014 net loss of $375.23 million.

Solar City Financial Statement Analysis

5

Analysis of the company’s liquidity using the current ratio (1.77) shows us that SolarCity’s cash inflows are greater than their cash outflows in the short run, while the quick ratio (1.17) shows that SolarCity has the ability to convert marketable securities and accounts receivable to cash in the short run to meet their current liabilities.

The Liabilities-to-Equity Ratio (2.4) shows SolarCity is very reliant on creditor financing as opposed to stockholders’ equity, much higher in comparison with the industry standard of 1.0 for publically traded companies; while the total debt-to-equity ratio (.83) shows that operating current liabilities will be paid from current assets, which in 2014 comprised roughly 21.9% of their total assets.

SolarCity Financial Statement Analysis (continued)

6

2010 2011 2012 2013 2014$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

R² = 0.966502685456356

SolarCity Annual Revenue Forecast

SolarCity Annual Revenue Solar City Annual Revenue Trendline (Linear Regression)Year

Sola

rCit

y An

nual

Rev

enue

(in

tho

usan

ds)

7

2010 2011 2012 2013 2014$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

R² = 0.976308714695102

R² = 0.855879617062023

SolarCity Cost of Goods Sold (COGS) Forecast

Cost of Goods Sold (COGS) COGS Trendline (Linear Regression)COGS/Revenues Common Size COGS/Revenues Common Size Trendline (Linear Regression)

Year

Sola

rCit

y C

OG

S (i

n th

ousa

nds)

CO

GS/

Rev

enue

s C

omm

on S

ize

8

2012 2013 2014 2015 2016 2017 2018 2019 2020$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

R² = 0.879000029019328

SolarCity Selling, General, and Administrative (SGA) Expense Forecast

SGA Expense SGA Expense Trendline (Polynomial Regression)Year

SGA

Expe

nse

(in

thou

sand

s)

9

Summary of SolarCity Valuation Parameters

Valuation Parameter Amount/PercentageEquity Risk Factor (market beta) 1.24

Risk Free Rate 1.03%

Market Risk Premium 12.50%Required Rate of Return on Common Equity 16.47%Current Share Price $53.48Number of Outstanding Shares 93,333,880Current Market Value $4,991,495,902Implied Value of Equity ($7,410,905)Long-run Growth Assumption Used in Valuation 12%

Discounted Free Cash Flows for All Debt and Equity Stakeholders Valuation Model  Total Present Value (PV) of Free Cash Flows ($8,197,932)

Estimated Value per Share ($0.10)Discounted Free Cash Flows for Common Equity Shareholders Valuation Model  

Total PV Free Cash Flows to Equity ($7,235,977)Estimated Value per Share ($0.08)

Residual Operating Income Valuation Model  Total PV of Equity ($7,269,595)

Estimated Value per Share ($0.08)Residual Operating Income Market-to-Book Valuation Model  

Total PV of Equity ($7,269,595)Estimated Value per Share ($0.08)

Discounted Dividends Based Valuation Model  Total PV of Dividends ($7,410,905)

Estimated Value per Share ($0.08)

10

2015 2016 2017 2018 2019 2020-$800,000

-$600,000

-$400,000

-$200,000

$0

$200,000

$400,000

$600,000

R² = 0.991379137207948

R² = 0.926222528069412

SolarCity Net Income and Net Operating Cash Flows Forecasts

Net Income Forecast Net Income Trendline (Linear Regression)

Net Operating Cash Flows Forecast Net Operating Cash Flows Trendline (Linear Regression)

Year

Net

Inc

ome

and

Net

Ope

rati

ng C

ash

Flow

s (i

n th

ousa

nds)

11

Improving Economic Recovery Continuing expansion in housing market Government Sponsored Mandates, Rebates and

Programs Investment Tax Credit (ITC) - 2017 Potential

Stepdown of ITC from 30% at present to 10%

Renewable Portfolio Standards (RPS) – 30+ states require electric providers to increase the amount of renewable energy sources in their power supply

SunShot Prize: Race to 7-Day Solar – sponsored by US Department of Energy

External Factors To Consider in SolarCity Forecast

12

Electric Utility Infrastructure (Grid) Concerns: Monopolistic Tendencies

Net metering rules Changing rates Discriminatory solar fees

Stationary Solar Power Storage Additional market for Tesla batteries Can alleviate peak demand during system wide grid

stress Financial Partnerships with Google, Credit Suisse, and

Goldman Sachs to fund solar projects – commitment of major corporations to solar industry

External Factors To Consider in SolarCity Forecast (Continued)

13

Competitive Rivalry May be high considering little differentiation among solar panel manufacturers

Power of Supplier SolarCity can exert control within this force via their acquisitions of Silevo and Zep

Solar.

Threat of Substitutes While substitution is a reality, few can meet SolarCity’s economies of scale

Power of Buyer Switching to another product following installation is costly for customers/buyers.

Therefore, buyers do not hold much power at this stage.

Threat of Entry SolarCity’s vertical integration is a significant barrier to entry: Upstream=Silevo, Zep

Solar; Downstream = Nest Labs, MyPower, Lease/PPA, and stationary storage battery.

Porter’s Five Forces of Competitive Intensity

14

In Millions SunEdison, Inc. First Solar, Inc. Sun Power Financial SolarCity CorporationBalance Sheet

2014 2013 2012 2011 2014 2013 2012 2011 2014 2013 2012 2011 2014 2013 2012 2011Total Assets

2788.002385.0

01459.2

01885.

906724.4

4 6883.506348.6

95777.6

14357.1

83898.6

93340.953379.3

3 4586.212809.5

31361.8

4 813.17Total stockholders equity

232.90 232.20 575.30 737.90 5027.49 4503.12 3605.53 3643.86 1562.74 1116.15 993.35 1657.43 745.64 617.60 214.32 88.06Total Liabilities

11266.90

6448.30

4126.30

4143.70

1696.95 2380.39

2743.17

2133.75

2794.44

2782.542347.60

1721.90 3840.57

2191.94

1147.52 725.11

Income Statement               

Total revenue

2484.40 2007.602529.9

02715.5

0 3391.81 3308.99 3368.55 2766.21 3027.27 2507.20 2417.50 2219.23 255.03 163.84 128.66 59.55Gross profit

221.90 145.30 335.60294.9

0 827.11 862.75 852.75 971.75 625.13 491.07 246.40 509.89 78.60 39.37 50.89 12.42Net income

-1180.40 NA NA NA 396.92 NA NA NA 245.89 NA NA NA -375.23 -151.76 -113.73 -73.71

Cash Flow Statement

               Net cash provided by operating activities

-770.00 -706.80 -263.50 -15.30 680.99 856.13 762.21 -33.46 8.36 162.43 28.90 166.57 -217.85 174.52 60.33 18.08Net cash used in investing activities

-2639.80 -860.90 -512.50

-1262.9

0 -511.88 -537.11 -383.73 -676.46 -309.24 -153.18 -220.07 -427.41 -1344.81 -729.90 -449.06 -304.25Net cash (used in) provided by financing activities 3801.70 1594.90 764.80

1150.70 7.36 101.16 -89.11 571.22 498.57 294.07 -75.71 261.34 1489.97 972.38 498.34 278.37

Benchmark Analysis- Financials

15

Key Financial Parameter RatioSolar City

CorporationFirst Solar,

Inc.SunPower

CorporationSunEdison,

Inc. Solar IndustryOverall Market

Valuation            

Price/Sales Ratio 23.19 1.32 NA 2.11 2.8 1.67

Price/Earning Ratio NA 11.23 13.78 NA 17.98 20.59

Price/Book Ratio 6.92 0.89 2.21 22.79 2.07 1.96

Price/Cash Flow Ratio 1.17 6.55 404.98 NA 20.06 12.6

Operations            

Days of Sales Outstanding 75.5 24.2 93.9 69.3 40.4 49.2

Inventory Turnover 1.6 7.6 13.3 10.5 3.2 9.2

Days COGS in Inventory 339.9 63.6 34.5 38.3 21.1 62

Asset Turnover 0.1 0.5 0.7 0.3 0.7 0.5

Net Receivables Turnover 5.3 7.7 4.6 6 4.9 7.3

Effective Tax Rate NA 6.97% 4.75% NA 32.92% 30.68%

Profitability            

Gross Profit Margin 30.82% 24.39% 20.65% 8.93% 24.57% 39.35%

Pre-Tax Profit -157.61% 12.74% 6.10% -58.85% 2.48% 6.76%

Net Profit Margin -21.97% 11.70% 8.12% -47.51% 3.20% 5.68%

Return on Equity -8.22% 8.33% 18.36% -507.59% 2.13% 5.93%

Return on Assets -1.52% 5.83% 5.96% -12.99% 0.75% 1.85%

Return on Invested Capital NA NA NA NA 59.00% 4.96%

Benchmark Analysis - Ratios

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Current Ratio 1.77 3.19 2.13 89.00% 1.55 1.9

Quick ratio 1.38 NA NA NA 1.07 1.31

Leverage Ratio 2 0.03 0.59 26.28 0.33 0.57

Interest Coverage NA NA 3.75 NA 12.75 5.92

Total Debt/Equity 2.08 0.04 0.76 30.91 0.2 0.54

Benchmark Analysis – Ratios (Continued)

Key Financial Parameter Ratio

Solar City Corporation

First Solar, Inc.

SunPower Corporatio

nSunEdison,

Inc.Solar

IndustryOverall Market

17

We recommend SolarCity stock as a ‘Watch’. It is currently overvalued (Market to book ratio = 6,694 as of 12/31/2014).

Variables to consider Inventory Ratio of 1.6 is low compared to competitors. Total debt/Equity of 2.08 is high compared to

competitors. Pre-tax profit is low vs industry average in this sector. Lower ROE and ROA vs. Industry ITC Continued Improvement in lowering SG&A Expenses Improvement of Collection Period Management is so far willing to take lots of risk. Operating Cash flow is not forecasted to be positive until

2017. Net Income is not forecasted to be positive until 2024. Short term losses seem unavoidable but long term gains

are anticipated.

Conclusions