SolarCity and Tesla: Why You Should Short the 2 'Musk'eteers
It seems like the Elon Musk bubble has finally popped as shares of SolarCity (SCTY) and Tesla (TSLA) have finally started heading towards a more reasonable valuation. Both SolarCity and Tesla have performed terribly this year and are down 65% and 38% year to date, respectively.Amid the market selloff, many of the momentum stocks have take a beating and SolarCity and Tesla are no exception to it. Despite the massive plunge in share prices, I think both SolarCity and Tesla have a lot more downside potential left.
Both the Musk companies have many similarities and all of them look bad for long-term investors. SolarCity and have both performed nicely in a bullish market, however things will get ugly if the market downturn continues. Both SolarCity and Tesla have been reporting considerable losses. And as I have mentioned in my previous articles, loss making companies tend to get punished more heavily during a bear market.
I have always been skeptic about companies that have a history of loss making and have been bullish on both SolarCity and Tesla for a lot of time. The recent quarterly reports from both the companies affirm my bearish case on the companies. Both SolarCity and Tesla reported wide losses for the latest reported quarter.
Both SolarCity and Tesla failed to meet their respective guidance. Shares of SolarCity plunged over 30% following the guidance miss. However, on the contrary, shares of Tesla jumped when the company affirmed its full year guidance. Irrespective, I think Tesla’s guidance is unrealistic and the company will fail to meet it once again. In addition, Tesla also removed the cash flow number from its balance sheet which signifies that the company is bleeding money at a rapid speed.
As for SolarCity, the company is reporting deep losses and its interest expense is almost equal to its operating profit, which shows that the company will never become profitable. Hence, both SolarCity and Tesla should continue losing money in the future. Both the companies have a dodgy business model and will never turn profitable. In addition, both SolarCity’s and Tesla’s debt is also growing. For these reasons, I think investors should short SolarCity and Tesla.
I have been bearish on many non profitable companies that have a bad business model in the past. Most of those companies have lost considerable over time and I think SolarCity and Tesla fall under the same category. With a history of loss making, growing debts, and no profitability in sight, I think SolarCity and Tesla are compelling shorts at the moment. Although both SolarCity and Tesla have lost considerable value in the last few weeks, I think the stocks have a lot more downside potential and should be shorted.