Why SolarCity Is a Screaming Short
SolarCity’s (SCTY) shares have appreciated since touching the 52-week lows. The stock has recovered impressively on the account of shorts booking profits and insider buying. However, the company’s business model is still in tatters and the recent rally can be used as a shorting opportunity by investors.Yes, I have been wrong with my last short call on SolarCity, but I also recommended investors to sell the stock when it was trading above $70. I am still confident about my latest short call, which is why I’m recommending investors to short the stock again.
The first thing that makes SolarCity a short is the company’s history of loss making. SolarCity has been bearing losses for years, and the future doesn’t look any better as earnings estimates continue to plunge to new lows. Growing companies tend sacrifice profits in order to grow market share, but SolarCity’s growth has slowed down considerably.
The company’s losses are widening with each passing quarter. In addition, what makes the matters worse for the company is the fact that its net debt position is worsening. The company is highly-leveraged and with its history of loss making, I’m unsure as to when the company will pay back its debt.
Moreover, the company’s business model of leasing solar panels may not work anymore in the future. Investment tax credit, or ITC, for residential and commercial is set to expire in 2016. This would make the installation solar panels a lot let feasible for both consumers and commercial uses.
Dropping solar panel costs have substantially boosted the deployment of solar panels, and the expiry of ITC can potentially reverse the recent progress that solar companies have made. Hence, for these reasons, I think SolarCity is a screaming short after the recent rally.
Short covering may have sent SolarCity’s shares higher, but the recent rally is unjustified and has opened a shorting opportunity. The company is still trading at an extreme premium and possesses about 50%-60% downside from present levels. Troubled business model, lack of profitability, and increasing debt will definitely weigh in on the stock in the long run. Hence, I would recommend investors to short the stock at current levels.