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Solar's 'boom-bust cycle' evident in Q1 results

In manyrespects it was a rough first quarter for rooftop solar installers. But many analystsand executives see some rocky quarterly results as an inevitable byproduct of adynamic industry primed for growth, even if that growth sometimes arrives in fitsand starts.

shares dove May 10 after the country'slargest rooftop solar provider released earnings results, one day earlier. Basedon weak first-quarter bookings, SolarCity cutits forecast for installed capacity for the remainder of the year toa range of 1 GW to 1.1 GW, from prior guidance of 1.25 GW. The company also reporteda non-GAAP loss for the first quarter of $2.56 per share, missing S&P GlobalMarket Intelligence's EPS estimate of a loss of $2.39 per share. Although SolarCity executives sought to reassureinvestors by touting its vertically integrated structure, scale andexpertise, analysts slashed estimates for the company, with Credit Suisse cuttingits price target to $38 from $62.

saw its after first-quarterearnings and revenues also came up short of analyst expectations. Vivint reporteda non-GAAP EPS loss of 65 cents, compared to 57 cents in first quarter 2015, withtotal revenue climbing to $17.2 million, compared to $9.5 million in first quarter2015. The S&P Global Market Intelligence consensus EPS estimate for Vivint inthe first quarter was a normalized loss of 59 cents on revenues of about $17.9 million.

over thelast few months after its aborteddeal to merge with SunEdisonInc. disrupted sales and hampered its ability to raise capital. In thewake of the SunEdison meltdown, Vivint has set more modest installation growth targetsthan competitors SolarCity and SunrunInc.

The recentbankruptcy of SunEdison, filed inApril, seems to have marked a kind of turning point for renewable powercompanies in demonstrating that while the outlook for sources like wind and solargrow in promise, so too do the risks of over-leveraging and the necessity of executinggrowth plans by the companies developing these technologies. First-quarter earningsresults for such companies appear to bear that out.

reported of $6.3 million,compared to the S&P Capital IQ consensus estimate of $10.7 million, and downfrom the year-ago period's EBITDA of $58.8 million. First Solar Inc. saw its shares decline after thatcame up short of analysts' estimates and announced the resignation of its CEO. Andthough the yieldco co-sponsored by SunPower and First Solar, 8point3 Energy Partners LP, reported first-quarter cash availablefor distribution well above earlierguidance, shares of all three companies have been on a downward trendsince April 27.

Windgeneration, meanwhile, has been a different story. With fewer pure-play public windgeneration-focused companies, direct comparisons to the recent fortunes of solarcompanies are difficult. But PatternEnergy Group Inc., with a portfolio of 16 operating wind facilities,reported a 67% increase in adjustedEBITDA for first-quarter 2016 and is tripling cash available for distribution.With $335 million in liquidity and a new $200 million at-the-market line of equityprogram, Pattern Energy executives suggested the company is poised to add to its generation portfolio oncemarkets begin to thaw toward renewable yieldcos.

Amongmore diversified companies, in April SouthernCo. management forecast its competitive generation subsidiary, , would be assets, and boosted its renewableproject development pipeline, forecastingbringing 2,400 MW to 3,800 MW of new wind capacity in 2017 and 2018.

The long view

A contributingfactor to first-quarter results was the extension by Congress, , of tax credits for windand solar developers. On Solar City's earnings call, CEO Lyndon Rive attributeda "lull," in first-quarter commercial bookings to customers having moretime to make decisions on installations as a result of the investment tax creditextension. And while not a development company, on Pattern Energy's call Presidentand CEO Mike Garland described the recentIRS guidance around constructing wind projects as a major positive factorlikely to encourage the development of large wind projects for the next four years.

At GTMResearch's solar summit in Arizona,several experts asserted the residential market may be adjusting to lower, but moresustainable growth rates, while utility-scale projects continue to boom. The U.S. solar project pipeline grew 41% last year to around20,100 MW. "Twenty GW is a huge pipeline relative to the size of the market,which was a 7.2 GW overall solar market in the U.S. last year and a 4 GW utility-scalemarket," GTM Research Senior Vice President Shayle Kann said May 11 at thefirm's solar summit.

Noting the troublesome publicly-traded solar companies face despite forecasts of significant marketgrowth, SunPower President and CEO Tom Werner said, "this massive opportunitybreeds a fair amount of chaos."

"So you have this great growthopportunity and capitalism works and a lot of people want a piece of it and youget aggressive behavior, which is required to grow," Werner said. "Onthe flip side, think about what it takes to grow … it's an execution game. So theconundrum is you have to be great at execution but you have to be a little crazy… to take risk."

A buying opportunity

Takinga more granular view of individual solar companies also offers causes for investoroptimism, according to Guggenheim Securities LLC analyst Sophie Karp, who said alot of good news out of SolarCity's first-quarter results was drowned in the headlinesof reduced installation guidance.

"What went right for them in the quarter was completelylost in the message that they delivered and they guided down on installs for theyear and stuff like that," she said. "People are really not paying attentionto the actual underlying positive trends." she said. Those trends include SolarCity'songoing reduction in installation costs for both residential and commercial andindustrial segments, reaching a break-even point on cash flow and a with John HancockFinancial, which demonstrates that SolarCity's development company is profitable.

"It is a buying opportunity," Karp said of the selloffin SolarCity shares. "The markets are not giving them credit for this reallyimportant development on this cash equity transaction and the fact that they breakeven on the cash level now so I think that was really lost in translation, so tospeak."

As for the industry at large, Karp said increasing visibilityaround 2017 bookings, as any volatility from tax credit extensions shake out, willbe the key indicator of the health of these markets for solar developers. "Ifyou talk about other developers … they need to provide some clarity into what theirpipelines of projects begin to look like because their bookings are going to beginto shape up for 2017 pretty soon," she added. "And I think the incrementalguidance for what 2017 is looking like is going to be significant."