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Subject:  Re: Found a new solar investment Date:  9/30/2013  2:47 PM
Author:  convexvalue Number:  956 of 1287


Thanks so much for such a thorough reply!

Wouldn’t a growing annuity solve the issue of forecasting the lease payment revenue? I too wanna be wary of making too detailed projections (doesn’t improve understanding, makes us overconfident). However a 20 year fixed payment, growing at the inflation rate or so, doesn’t seem too far fetched. And we can project that future lease payments coming from incremental contracts decrease over time to account for competition. According to *anecdotal evidence I gathered over the internet*: there are some solar-energy installers in America offering comparable one-stop-shop services whose undiscounted lease payments per customer are about $5K lower than SCTY’s cost– a considerable sum for most households our there. I think SCTY can achieve a reputation for quality and justify higher prices than the competition, but i doubt they can manage to increase price on an absolute/nominal basis. I agree with your projection of falling $$/MW in the future.

My issue is mainly about the cost structure, and how opaque the company is regarding the cost assumptions in the RV calculation. If I had to model that, I guess I would apply a growing annuity + a big lumpy initial payment (to account for the solar system purchase). I care about this cuz I surmise that solar energy installers such as SCTY are benefiting from excess supply and solar equipment dumping on behalf of Chinese exporters selling at a loss. I would like to figure out how this would look like if the industry became more rational and starting selling equipments at higher prices – and its effect on solar-energy-installers. As you well pointed out, doing this is incredibly hard at this point, we just have too little information and there are too many variables.

In any case, I agree with you that one shouldn’t over-model stuff we know little about. That is clearly the case with SolarCity given the opacity of the cost structure (and RV assumptions regarding projected costs). I realize that all valuation methodologies are relative (even DCF); but I still feel a heck of a lot more confident buying the stock of a company I think is undervalued based on a DCF estimated fair value, than buying the stock of a company whose valuation is limited to the projection of sales and other (non FCF) metrics such as RV, and applying an exit multiple. That said, I think your model is the best next thing given the information we currently have.

I consider myself to be a novice investor, and I think that studying other investors’ valuation models is the best education one can get (that is, after thoroughly studying everything Buffet ever said). Again, thanks a bunch for sharing your insights!

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