Elon Musk-Backed SolarCity Seeks IPO Multiple of 19 Times Peers

19 january 2013

NEW YORK CITY — SolarCity Corp., the solar power provider led by billionaire Elon Musk, is betting prospects for clean energy and Musk’s name will help it garner a valuation 19 times the price of peers in an initial public offering.

The IPO, scheduled for today, would value the San Mateo, California-based company at about $1 billion, or about 8 times sales in the 12 months through September. That compares with an average price-to-sales multiple of about 0.4 for publicly traded companies such as Real Goods Solar Inc. and First Solar Inc. SolarCity is pushing ahead with its offering after completing the most equipment installations in California, the U.S.’s biggest solar-power market.

While Musk may be aiming to replicate the performance of his Tesla Motors Co., which has doubled since its 2010 IPO, SolarCity is contending with a market that has pummeled public solar stocks and a pending U.S. government inquiry into its accounting practices that may raise costs. Still, while the valuation SolarCity seeks may be “excessive,” the company has established itself in a business that’s poised to grow, said Debra Fiakas, managing member of New York-based Crystal Equity Research LLC.

“SolarCity competes in the integration and installation market with a lot of mom-and-pops, and that makes them incredibly powerful, because they don’t face any large competitors,” Fiakas said in a phone interview. “They’re a new-age utility of sorts. They represent the distributed utility that we’ve started to talk about.”

Lower Rates

SolarCity and existing owners are seeking $151 million, offering 10.1 million shares, equivalent to a 14 percent stake, for $13 to $15 each, according to regulatory filings. Musk, the biggest shareholder, doesn’t plan to sell shares, and filed last week to buy $15 million of the company’s stock in the IPO.

SolarCity is one of a handful of companies that lease solar panels to customers, install them on their property, and charge them below-market rates for the electricity they generate. Jonathan Bass, a spokesman for SolarCity, didn’t respond to a phone call and e-mail seeking comment.

In California, the largest U.S. market, SolarCity has completed more installations than any other developer, according to the California Solar Initiative, a state-run program that tracks construction data. SolarCity says it has provided systems for more than 45,000 buildings in 14 states. A competing top developer, Sunrun Inc., says it has more than 20,000 customers 10 states.

Increasing Demand

U.S. spending on energy-efficiency services will increase more than four-fold between 2008 and 2020, reaching as much as $80 billion, SolarCity said in regulatory filings, citing Lawrence Berkeley National Laboratory.

Increasing demand for renewable energy means SolarCity, which booked a $95 million net loss in the year through September, has the potential to gain value, according to Kevin Landis, president of Firsthand Capital Management Inc. in San Jose, California, which holds shares of the company’s stock.

“If you look just at revenue, they may seem a little expensive,” Landis said in a phone interview. “I care more about their bookings and trends in bookings than their revenue recognition, and that shows them to be a good value. It’s a story I believe in.”

Even as demand for alternative energy rises, solar-company stocks have been hurt by oversupply of equipment and raw materials. That has depressed the World Solar Energy Index of company shares as much as 65 percent this year, extending the drop from its 2007 peak to 96 percent.

Tax Credits

Real Goods Solar, the Louisville, Colorado-based company that SolarCity names as a competitor, has a market value of about $18.5 million, or less than 0.2 times trailing 12-month sales, data compiled by Bloomberg show. First Solar, a solar- panel maker based in Tempe, Arizona, has a market value of about $2.6 billion, about 0.9 times sales in the period.

While SolarCity currently benefits from tax credits totaling as much as 30 percent of the cost of these systems, the company’s accounting method for valuing the equipment has recently come under scrutiny.

In July, SolarCity and competitors received subpoenas from the U.S. Treasury Department for documents related to grants the company received for building solar systems, filings show. SolarCity said collecting the documents could take six months to complete and that a decision from the department’s inspector general may take as long as a year after that.

“SolarCity is facing some pretty big risks right now,” said Mark Bachman, a renewable energy analyst at Avian Securities in Boston. “The timing of this IPO is a little strange given their legal issues and the fact that they’re still losing money.”

Musk Magic

Musk, a co-founder of PayPal Inc., may be able to extract more from investors given the success of unprofitable electric- car maker Tesla, which he took public in 2010 at a premium. Tesla, another company that he co-founded in a nascent industry, has more than doubled in value since then, bolstering his estimated $2.6. billion fortune.

SolarCity so far has raised $1.57 billion in financing from banks and companies such as Credit Suisse Group AG, Google Inc., PG&E Corp. and U.S. Bancorp, according to its filing.

The company, co-founded by Musk’s cousins Lyndon and Peter Rive, is also backed by venture-capital firm Draper Fisher Jurvetson, which will hold a 21 percent stake after the IPO. Lyndon Rive is the chief executive officer, and his brother Peter is the chief operations officer and chief technology officer, filings show.

Goldman Sachs Group Inc., Credit Suisse Group AG and Bank of America Corp. are leading SolarCity’s IPO. The stock will be listed on the Nasdaq Stock Market under the symbol SCTY.