Solar City IPO: A Bit Pricey

by Debra Fiakas CFA

Renewable energy retailer SolarCity has filed for an initial public offering of 10 million shares of its common stock and a few shares owned by existing shareholders.  The offering is valued at between $130.0 million and $150.0 million based on an anticipated share price between $13 and $15 per share.  SolarCity expects its shares to trade on Nasdaq under the symbol SCTY.

Proceeds raised by SolarCity will be used support acquisitions of complementary operations.  Proceeds could also be used to support SolarCity’s capital spending program as it seeks to extend its distributed network of solar systems on residential and commercial buildings. SolarCity’s installed base expanded to 33,792 buildings by the end of June 2012.

The majority of SolarCity’s revenue comes from the sale of solar-generated electricity. SolarCity has yet to produce an operating profit.  Indeed in the six months ending June 2012, the company’s operating loss deepened compared to previous periods.  That said, scale is on SolarCity’s side.  Revenue from solar energy system sales increased to $51.7 million in the first six months of 2012, compared to $11.2 million in the same period of the previous year.  Profit margin on this segment increased to 14.9% compared to negative 46.2% in the prior year.

In my view, this a deal worth considering, but only after the shares get some seasoning.  A $13.00 per share price puts a $932 million market value on SolarCity and implies a multiple of 8.4 times revenue.  This seems a bit pricey given that the company has not been consistently profitable.

The deal was expected a month ago, but was delayed when Hurricane Sandy literally fouled up the works on Wall Street.  I will be watching SolarCity carefully.  The company has so far done a good job of building the sort of distributed power generation system our country needs as it moves away from fossil fuels for electricity generation.  Priced right, it could be an excellent long-term hold.
 
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.