SolarCity Corp (SCTY): Aggressively Priced?

SolarCity Corporation (SCTY) has a lot more to add to today's advance of more than 4% according to Baird. The broker upgraded SolarCity to an "Outperform" from a "Neutral" rating. Analyst Ben Kallo upped his price-target to $70 from $50, which is potential upside of 24.4% to target as we type.

SolarCity engages in the design, installation, and sale or lease of solar energy systems to residential and commercial customers, and government entities in the United States. SCTY installs solar panels at minimal or no cost to customers who agree to purchase the energy from SCTY.

Kallo likes that SCTY was able to raise money with a debt offering backed by revenue from rooftop solar projects. Bloomberg New Energy Finance analyst Stefan Linder says, "This is really the first time we've seen asset-backed financing for a distributed-solar company." The green-tech company raised $54.4 million.

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Kallo agrees with Linder, "The announcement represents one of the first solar asset backed securities (ABS), and separates SCTY as one of the most innovative public solar financing companies. We have lowered our discount rate for future projects based on the 4.80% interest rate of the ABS, and believe the stock will react favorably as investors recalibrate their expectations for SCTY."

To evaluate the possibility of $70, iStock has to focus on price-to-sales (P/S) since the sun stock doesn't make a profit and isn't expected to profitable in 2015, either.

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For 2014, Wall Street has a consensus revenue estimate of $256.62 million, which is 61% higher than this year's forecast of $159.44 million. SolarCity's five-year P/S sales range is 1.47 to 29.24 with an average of 10.18 – whew! those are some lofty valuations, even with 61% revenue growth. Today, the stock is setting a new record at 30.39 times revenue.  

To hit Baird's $70, investors ! will pay 21.08 times 2014's consensus revenue estimate. That's double the five-year average but well below today's record. SCTY would trade at $32.69 with the five-year average P/S ratio.

If SolarCity is able to string a series of successes together as Kallo believes will happen, then it is not too much of a stretch for P/S to expand; however, of the 31 solar stocks that trade for more than $1, SCTY has the second highest P/S ratio already. In fact, if you throw out number one and two (SCTY), the other 29 solar stocks trade with an average price-to-sales ratio of 0.97.

Perhaps, the wide discrepancy explains why 34% of SolarCity's float (stock available for trading) is sold short. The large short-position, as well as only 79.92 million shares outstanding, is going to make for volatile price swings.

Overall: SolarCity Corporation (SCTY) is appropriate for hyper-aggressive investors, in our view. Considering the enormous P/S premium relative to the solar industry, it's our opinion that 24.4% upside to Baird's target is not worth the additional valuation risk relative to 29 other peers.