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Martin Tillier

Martin Tillier

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This Solar Company Keeps Reporting Losses But You May Want To Buy It Anyway

We all know that logically we should assess the value and prospects of any stock based on the profitability and prospects of the company. That is investing 101, but sometimes other factors take over. In the case of SolarCity Corp (SCTY), buyers seem to be motivated by anything but profitability. The company has never made a profit since the IPO nearly two years ago, but even so, despite losing a lot of ground since the high back in February, SCTY is trading at over five times what it was then. The gut reaction of any value investor when looking at the basic numbers would be to avoid, or even short, SCTY, but that doesn’t tell the whole story. 

The discrepancy comes from the fact that GAAP reporting doesn’t do justice to the company, as much of its business comes from leasing agreements. Revenues from those agreements will be counted over a number of years, around twenty in most contracts, while some of the expenses are accounted for immediately. Management has attempted to address this discrepancy by including a non-GAAP measure of “Retained Value” (RV) in their quarterly reports. The way that is calculated contains some assumptions that can be questioned, such as the prediction that all contracts will be renewed for a total of thirty years, but in many ways, the concept of RV is a valid one.

Whether you take into account future revenues or not, however, one thing cannot be denied; SolarCity is growing extremely quickly. It is…

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