SolarCity: Abysmal Business Model. Look Out Below!

SolarCity (SCTY) is another one of those stocks that I have recommended shorting multiple times over the last few months. The recent extension of Investment Tax Credit fueled a rally in SolarCity’s stock, however I was quite sure that SolarCity’s business model is unsustainable and the stock will come crashing down sooner rather than later.

My analysis played out perfectly yesterday when SolarCity released its quarterly earnings report. Although the company beat Q4 revenue and EPS estimates, the company has reported quarterly installations of 272MW, up 54% year over year, below its guidance of 280MW-300MW.

In addition to the weak installation numbers, SolarCity expects installations in seasonally weaker Q1 to reach a total of 180MW, down 34% sequentially and up 18% year over year.
Q1 EPS guidance of -$2.55 to -$2.65 was also considerably below a -$2.36 consensus.

SolarCity has a dodgy business model which would never allow it to turn a profit. The company’ losses have been piling on and it was only a matter of time before the stock came crashing down. Reality ultimately caught up with SolarCity as the stock is down almost 40% in the last five days.

Investors who have missed out on shorting it can still reap the rewards as I think SolarCity has more downside to offer. I never really like companies that have a long record of loss making. More often than not, such companies tend to have a weak business model that kills the chances of them reporting considerable profit in the long-run.

Of course, SolarCity falls into this category and with no profits still in sights, I think investors can still short SolarCity as I think the stock is going down to single digits. SolarCity’s gross profits are almost the same as its interest expense and this has been the case for quite some time some. Clearly, SolarCity’s business model is not sustainable in the long-run and I expect the stock to continue heading lower into the single digits.

Conclusion

Loss making companies get absolutely hammered in a bear market, and given the recent market correction, I wouldn’t be surprised to see SolarCity trading at around $5 in 12 months. Investors who have missed out of the recent downfall can still make a hefty profit my shorting SolarCity. The company’s unsustainable business model will ensure that the companies losses and debt keeps growing, which in turn will push the stock lower. My 1 year price target for SolarCity is $5.
Published on Feb 10, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...