Buyer Beware: Tesla's SolarCity Acquisition Already Showing Red Flags

By Markets Fool.com

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Image source: Getty Images.

Tesla Motors' (NASDAQ: TSLA) official offer to buy SolarCity (NASDAQ: SCTY) for $2.5 billion has gotten most of the headlines today, but it's not the only item investors should be looking at. SolarCity quietly gave investors an update on its operations and the news wasn't good at all.

I think the biggest question facing both companies in the merger is whether or not SolarCity is being bailed out and what value it can add to Tesla Motors. And the bailout story should get a little louder after Monday.

Disappointment continues

SolarCity has always been a growth story stock. For most of its history as a public company, SolarCity has been at, or near, 100% growth year over year. But the past year has seen a rapid slowdown in growth. And the last six months have been downright disappointing.

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When the company reported fourth quarter 2015 results, which missed guidance in their own right, it finished a year when 870 megawatts of solar systems were installed. That's less then the 1,000 megawatts management had hoped for, but it's still a large number. And at the time, management was expecting 44% growth in 2016 to 1.25 gigawatts. But since then guidance has been dropping like a rock.

Below, you can see what management has guided for installations in 2016. The latest revision was released today.

Date

2016 Installation Guidance

February 9, 2016

1,250 MW

May 9, 2016

1,000 MW-1,100 MW

August 1, 2016

900 MW-1,000 MW

Source: SolarCity.

Lower installations are bad for a number of reasons. First, it doesn't allow the company to spread operating costs across a wider number of installations, effectively raising the cost of each watt installed. It also shows SolarCity's inability to expand its market, no matter how much it spends on marketing. And the solar industry trends are moving away from the business model SolarCity pioneered.

Elon Musk wants to add energy storage to solar systems, but the economic case is yet to be made for customers wanting to pay for such a service. Image source: Tesla Motors.

What's driving SolarCity's disappointing results

What shouldn't be lost on investors is that SolarCity's bad year isn't hitting every solar company. In fact, SolarCity is losing more share in 2016.

A big part of SolarCity's problem is that it hasn't had a solar lease product that customers are now demanding. Signing a 20-year contract doesn't make sense when loans are available at low costs and an installation is $15,000, or less.

The bigger challenge could be that SolarCity's cost structure is no longer competitive. Third party studies are showing that customers can buy solar systems from local installers for less than SolarCity's cost in many places. And long-term, more nimble local installers should be able to take even more market share.

Tesla Motors really wants to buy now?

SolarCity's business is struggling mightily and it indicated that layoffs are likely on the horizon because of missed installation guidance. And given the competitive landscape with smaller competitors offering more flexibility, lower costs, and better financing, I don't see how the company could be considered well positioned ahead of the Tesla Motors merger. Maybe Tesla is bailing out SolarCity after all, which may be good for SolarCity shareholders at the end of the day.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.