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SolarCity shares plummet on lower guidance; analysts slash price targets

Aftercutting its installation guidance for the year, SolarCity Corp. shares were trading down more than 26% atone point Tuesday, May 10, and several analysts slashed share price targets forthe country's largest rooftop solar company.

Releasingfirst-quarter earnings results after the close of markets May 9, SolarCity for installedsolar capacity in the remaining three quarters of 2016 to a range of 1 GW to 1.1GW, from previous guidance of 1.25 GW. SolarCity CEO Lyndon Rive said bookings duringthe first quarter were about 150 MW lower than expected, and attributed the declinelargely to uncertainty around a decision by Nevada regulators regarding the "grandfathering"of policies for net metering customers, which had a "spillover effect"into other states, impacting sales. For the second quarter of 2016, SolarCity forecasts185 MW of installed capacity.

The companyalso reported a non-GAAP loss of $2.56 per share for the first quarter of 2016.That result was lower than the year-ago period, in which SolarCity notched a lossof $1.52 per share, and the S&P Global Market Intelligence EPS estimate of aloss of $2.39 per share. SolarCity shares slipped more than 20% to $17.91 to afterhourstrading May 9. In midday trading May 10, shares were hovering around $17, aftera May 9 closing price of $22.51.

CreditSuisse cut its target price for SolarCity to $38, from $62, assessing the company'sfirst-quarter performance as even weaker than expected. "The magnitudeof the bookings weakness and guidance cut, however, were both slightly more thanwe expected and the capital challenges facing the company will force investors tore-evaluate the merits, and valuation, of [SolarCity]'s business," Credit Suisseanalyst Patrick Jobin wrote. "We take a more constructive stance given valuationwhile acknowledging some significant pressures and debatable strategic moves, alongwith the risks presented by any business that depends heavily on the capital markets."

Avondale Partners LLC Senior Analyst Michael Morosi cut his pricetarget on SolarCity shares to $30 from $40 and downgraded the company to "marketperform," noting the company is facing capital constraints at a time when leaner,efficient competitors are capturing market share.

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"SCTY succeeded in proving the market value of a residentiallease is $3.25/W, though investors are left with a host of new questions, chiefamong them is whether the efficiencies gained through a vertically integrated strategyare enough to offset consumers' lukewarm embrace of a product that may have runits course (residential solar leasing)," Morosi wrote in a May 10 researchnote.

Guggenheim Securities LLC analyst Sophie Karp observed a spikein SolarCity's total costs per watt of $3.18 in first quarter 2016, up from $2.89in first quarter 2015, and $2.67 in fourth quarter 2015. "The spike in thecosts is a function of lower volumes, higher C&I in the mix and a changing geographicmix," Karp wrote. "[SolarCity] expects to return back to 'normalized'costs in two quarters." Guggenheim lowered its price target for SolarCity to$36, but reiterated a "buy" rating.

On the earnings conference call, analysts noted SolarCity's strategyhas shifted somewhat from a focus on growth to one of cost reduction, with the goalof becoming cash-flow positiveby the end of 2016. This prompted one analyst to question Rive on SolarCity's currentbusiness model.

"The business model of SolarCity is to provide energy ata lower cost than you can get it today from fossil fuel," Rive responded. "Andthen long-term, our goal is to transform energy infrastructure to a renewable energyinfrastructure. In doing this, there are many different products that customerswant."

On the call, SolarCity management made the case that the factorscausing softer bookings had already begun to recede: primarily the launch of a newloan product and expansion into new states, as well as better regulatory clarityin key states like New York, Massachusetts and New Hampshire. Sales have alreadybegun to regain momentum, with the amount of booked MW up 25% over the past twomonths, according to the company, compared to the prior two months.

In order for SolarCity to regain investor confidence, accordingto Credit Suisse, SolarCity needs to execute on its plan to reduce its cost structureand hit its new 2016 guidance for installed capacity and positive cash flow. Thiswill require a "modestly," supportive regulatory environment, which thecompany has already achieved in most relevant jurisdictions, and continued accessto capital markets.