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Sun king

28 November 2012 By Jeffrey Goldfarb, Christopher Swann

SolarCity’s valuation looks powered by Elon Musk moon dust. The billionaire founder of electric car maker Tesla and Space Exploration Technologies is a big backer and chairman of the solar panel installation and financing company. Complex accounting and government-related risks cloud SolarCity as it prepares for an initial public offering in December. The mooted share price implies a big Musk premium.

Certain aspects of the company’s future look bright. SolarCity is exploiting a potentially more lucrative aspect of clean energy than the cut-throat business of manufacturing solar panels. Installations are funded by the likes of Google and U.S. Bancorp, which get tax credits for their investments. And in exchange for low- or no-cost panel fittings, consumers agree to buy electricity from SolarCity for 20 years.

Not all is sunny for SolarCity investors, though. The very nature of its model, including contracts with installation backers and the associated revenue-sharing, makes it hard to forecast what’s in store. There are outstanding questions from the Treasury Department’s inspector general over certain grants the company, and its rivals, received. SolarCity’s profitability is also much at the mercy of rebates and credits provided by Uncle Sam, whose finances are under severe constraint.

Baking all that into a valuation isn’t easy. At the $14 midpoint of its proposed share price range, SolarCity would be worth about $1 billion, or over six times estimated 2012 revenue of $150 million. The business is essentially the first of its kind so there’s nothing directly with which to compare it. But there are hints available elsewhere in companies that essentially offer equipment or installations of some kind on a subsidized basis to lock in future income.

Time Warner Cable, for example, trades on 1.25 times the consensus forecast for 2013 revenue. MicroFinancial, which leases office equipment, fetches about 1.6 times, while home security provider ADT is on three times. A blended multiple would be about two times. To get there, SolarCity would need to roughly triple its revenue, a feat it may come close to accomplishing this year – but will be hard-pressed to repeat. Investors will have to put an abiding faith in Musk’s star power.


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