Short SolarCity? AbsolutelySCTY) has plunged over 40% in the last few weeks. The company’s crash was fueled by a terrible earnings report and the stock is currently trading at $28, down considerably from 52-week highs.
SolarCity installed 256MW of solar systems in Q3, +86% Y/Y but slightly below guidance of 260MW. The company also slashed its Q4 guidance. SolarCity’s Q4 guidance is for 280MW-300MW of installations. That signifies full-year installations of 878MW-898MW, below prior guidance of 920MW-1GW.
Due to this downwards revision, SolarCity’s shares tanked 18% in a single day and are currently hovering near 52-week lows.
Investment tax credit
In the next one and a half years, the Solar Investment Tax Credit is set to expire for residential and commercial solar installations. This would result in the tax credit going from 30% to 0% for residential installations and from 30% to 10% for commercial installations. Over the last eight years, solar companies have benefited greatly from ITC as installations have sky-rocketed in the reference period. However, with ITC set to expire, solar installations are expected to take a massive hit.
Falling costs have been a great driver for solar industry, however the expiry of ITC will make the installation less economical. Installation prices can shoot up by as much as 40% for residential solar, and by approximately 25% for commercial solar. Without ITC, SolarCity’s business model of leasing solar panels will become toothless, as a result the company’s installation will slow down considerably.
Moreover, the company is already struggling with installations and the impending expiry of ITC is a big red flag for SolarCity longs. Hence, unless there’s an extension to this program, SolarCity’s growth will plummet in the next year or two.
SolarCity’s business model of leasing solar panels is overly reliant on ITC and with the program expected to expire by the end of 2016, SolarCity is in deep trouble. The company may have already lost close to 45% value in the last two months, but the stock still possess massive downside potential. I think investors still have the opportunity to short the stock. SolarCity is already struggling with installations and clearly the company is in troubled waters. Given the headwinds mentioned above, I am confident that SolarCity is still trading at an expensive valuation. Hence, I would recommend investors to continue shorting the stock.
Published on Nov 11, 2015By Ayush Singh
Posted in ...Market Commentary