Why SolarCity Might Be The Only Way To Play Solar Inflection

• Shares of SolarCity Corp (NASDAQ: SCTY) have lost nearly 25 percent year-to-date.
• Patrick Jobin of Credit Suisse has an Outperform rating on the stock with a $105 base-case valuation.
• Jobin also estimated a $180 per share "blue-sky scenario" valuation.

SolarCity is the leader in the U.S. rooftop solar market with a 30 percent market share and a key beneficiary within the solar market, according to Patrick Jobin of Credit Suisse.

In a report published Monday, Jobin noted that distributed solar has grown at an approximate 40 percent compounded annual growth rate for the last four years while less than 1 percent of U.S. rooftops have solar products. The analyst is expecting rooftop solar to reach a 10 percent penetration rate over the next decade, which bodes well for firms like SolarCity whose total addressable market stands at more than 35 million viable households.

Related Link: Analysts Are Having A Hard Time Predicting Solar Beyond 2016

Jobin said SolarCity has been the first to market with securitizations, enabling "full gearing" on projects that generate mid-teens unlevered returns with less than 6 percent cost of capital. The company leases its solar systems to customers with no upfront cost.

Finally, Jobin pointed out that SolarCity exhibits many characteristics of early life-cycle firms, specifically a negative cash flow return on investment (CFROI) with a very high growth profile. Near-term consensus estimates continue to suggestion CFROI levels will remain negative but the current market price implies the firm will improve its CFROI levels to plus-10 percent with a 15 percent compounded annual asset growth rate over the longer term. However, the potential exists for a greater improvement in CFROI or continued strong asset growth to warrant upside.

Top Pick

Bottom line, SolarCity is a "top-pick" given its "robust" growth outlook of 91 percent volume growth in 2015. The company is also in the process of finalizing plans to expand upstream to lower system costs by manufacturing high-efficiency solar modules, thereby preserving its "economic viability" after the termination of several government subsidies in 2017.

Shares are Outperform rated with a $105 "base-case" valuation that "embeds slowing growth and reduced project returns." The analyst also derived a $180 "blue-sky" valuation that assumes growth remains "robust" with "stable" returns.