Why Was SolarCity's IPO Price Slashed?

By Aaron Levitt | January 01, 2013 AAA

With prices for natural gas, coal and a few other traditional fossil fuel sources trading at low levels, it's been tough going for the alternative energy sector over the last few years. Solar in particular has been hit hard as a wave of subsidy and tariff cuts have become commonplace across the developed world. Big solar nations such as Spain, Germany and Italy have been forced to cancel lucrative breaks for PV manufacturers as they grapple with austerity measures and ballooning public budgets.

Given the harsh trading environment, it's no surprise why many solar manufacturers have seen their share prices tumble and why the broad sector plunged to new lows. It's also not surprising that many solar-based firms - such as BrightSource Energy - that planned to go public in 2012 shelved their initial public offerings (IPOs).

One firm, however, decided to brave the IPO market and paid the price in how much money it raised. SolarCity (Nasdaq:SCTY) went through with its plans, only after reducing its initial share price. The real question is, why did SolarCity reduce that IPO price instead of waiting until the market was in a better position to go public?

Down to $8
Unlike many of the stocks in the solar sector, SolarCity doesn't actually manufacture panels, but installs residential and small commercial PV systems. The key to the firm's pending success was its business model that allows customers to lease solar panels by paying a monthly fee in order to avoid the high costs of an outright array purchase. Solar arrays can cost thousands of dollars and take years to recoup their initial investments. That model was supposed to give the firm an edge in the IPO market. However, things didn't quite turn out as planned.

The San Mateo, California-based company originally planned to sell 10.1 million shares between $13 and $15 per share, which would have given it a market cap near $1 billion. However, after underwriters postponed the IPO, SolarCity amended its prospectus to sell 11.5 million shares at $8 a pop. Overall, the solar installer managed to raise $91 million after fees.

The IPO had been widely watched by cleantech and venture capitalists - especially since it was backed by Elon Musk, co-founder of Tesla Motors (Nasdaq:TSLA). So what went wrong?

Terrible Timing
First, the timing of SolarCity's IPO couldn't have been worse. Companies seeking to harness energy from the sun have struggled in recent years as American firms face stiff competition from China. "Dumping" allegations and Chinese subsidies have created a glut of panels currently on the market and have driven down prices to historic lows.

Add dwindling feed-in tariffs and government subsidies to the mix and many in the global solar industry have cut back production, laid off workers or declared bankruptcy - i.e., Solyndra. Even though it has a completely different business model, SolarCity faced the "solar panel stigma." That hurt its chances for an IPO success.

Secondly, the originally IPO price was set at a premium to other solar firms currently on the market. Institutional investors weren't willing to pay that premium for a somewhat untested firm - especially since some industry stalwarts such as First Solar (Nasdaq:FSLR) were trading at new lows relative to their historic values.

Finally, many analysts worried that the firm would have a hard time bringing in enough customers considering that the housing sector and the economy are in the dumps. Paying a monthly fee for solar panels seems like a luxury when costs for almost everything else have gone up in the last few years. Achieving critical mass may be difficult for SolarCity, and the firm warranted a lower IPO price.

The Bottom Line
While shares of SolarCity have risen quite nicely since their the debut - making IPO investors some decent coin - the fact that the company left money on the table certainly isn't a good sign for any other solar-related firm wanting to raise cash. The sector remains a difficult place to do business as long as subsides are absent and panels remain plentiful.

At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.

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