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New York - Elon Musk says Tesla Motors' $2.6bn takeover of SolarCity is no bailout. Analysts say it certainly can’t hurt.
SolarCity’s stock has fallen by 57% in the last year. It’s reduced its installation forecast twice, and a business model focused on leasing systems rather than selling them is losing favour with consumers. Meanwhile, market share for competitors like Sunrun is on the rise.
“Tesla provides an immediate source of differentiation,” according to Michael Morosi, an analyst at Avondale Partners. “It places them in a different stratosphere. Tesla knows how to manufacture things. SolarCity is about to become a manufacturer. They gain immediate knowledge when they need it most.”
SolarCity is the biggest US installer of rooftop solar panels. Tesla manufactures electric cars, and is opening the world’s biggest battery factory. Joining the two companies will lead to integrated homes that produce power from sunshine that’s stored in batteries to charge vehicles overnight, Musk said in a conference call on Monday.
Musk, the chairperson and lead investor in both companies, has promoted the synergies of the merged company. While there are advantages to SolarCity, Tesla investors have been less enthusiastic about taking on the solar installer with $3.25bn in debt.
Joining forces with Tesla will help SolarCity weather a needed strategic shift to selling systems instead of leasing, according Edwin Mok, an analyst at Needham. The electric car maker will also bring manufacturing expertise, which the solar installer lacks, and the combined operations are expected to lead to about $150m in cost savings within a year.
‘Profitable’
“Combined with a more aggressive approach to reduce operating expenses, we believe the business could turn profitable, potentially in the next 12 to 24 months,” Mok wrote in a research note on Monday.
He predicted that “the majority” of the combined company’s rooftop solar systems would be sold to customers, either for cash or through loans. That mirrors a wider shift as consumers show growing interest in owning the systems instead of the long-term leases that SolarCity popularised.
SolarCity lowered its 2016 installation forecast on Monday, for the second time this year. It now expects to add 900 megawatts to 1 gigawatt of panels, down from a May estimate of 1 gigawatt and a February prediction of 1.25 gigawatts.
WATCH: Elon Musk: The mind behind Tesla, SpaceX, SolarCity ...
Strategic shift
In October, the company announced a strategic shift that called for slower expansion in an effort to become cash-flow positive by the end of this year. SolarCity became the biggest US rooftop solar company by pouring revenue into building more systems, focusing on growth instead of profit, and it’s reported losses in all but three quarters since its initial public offering at the end of 2012.
The lower guidance reflects both temporary weakness in the residential solar market overall as well as healthier competition, said Jeffrey Osborne, an analyst at Cowen. In California in May, SolarCity’s share of the market decreased to 23% from 27%.
“Meanwhile, market share for competitors like Sunrun is on the rise,” Osborne said in an interview.
Lower price
The price announced on Monday was almost 10% lower than the $2.9bn initial price when the deal was announced in June.
“It basically mirrored the step-down in SolarCity’s outlook,” Morosi said. “They’re having some execution issues with 2016 guidance, but I think Tesla is getting a very good deal.”
SolarCity CEO Lyndon Rive reaffirmed on a conference call on Monday that the company will become cash-flow positive in the fourth quarter. He said the combination will restore advantages that had evaporated as the industry matured and competition increased. Tesla CEO Elon Musk brings to SolarCity a household name that could help reduce financing and marketing costs, and provide an edge over other solar companies.
“We’re larger than the next 50 solar companies combined,” Rive said on the conference call. “In order to continue to maintain this differentiation, you’ve got to do more than just vertically integrate the services. You’ve got to vertically integrate the product as well.”
