Why SolarCity Will Fall to $5

SolarCity (SCTY) has been one of my best short recommendations of 2016 as the stock is down roughly 65% year to date. Despite the downfall, SolarCity is still priced a lot higher than my $5 price target for the company. Investors who have made a hefty profit by shorting the stock in the recent weeks can consider closing their positions, however I think SolarCity has a lot more downside potential and investors should continue betting against the stock.

Insider Selling

SolarCity’s shares jumped a few months ago when Elon Musk increased his stake in the company.
However, what investors don’t realize is that SolarCity’s insiders have been dumping stocks for a long time.

Over the last 12 months, SolarCity insiders have dumped over 10 million shares, and much of it happened before the shares crashed. So, while investors are happy about Musk’s increased stake in SolarCity, other insiders have been dumping stocks left, right, and center.

While relying on insider trading is not a sure way of making profits, investors should be cautious when insiders start dumping shares at a rapid rate. Given the declining insider ownership in SolarCity, I think investors should continue shorting the stock and I am confident that it will be worth somewhere around $5 in the next twelve months.

Business Model

When it comes to SolarCity, insider selling isn’t my only concern. It is also the company’s bad business model. As I have said time and time again over the last few months, SolarCity’s business model is not sustainable in the long-run.

When SolarCity installs solar panels, it makes a long-term agreement with the clients for about 20 years where the clients pay them periodically. While this tactic has led to strong revenue growth, it is not sustainable in the long-run as SolarCity’s debt keeps on increasing.

SolarCity is a highly leveraged company and its interest expenses is almost equal to its cash flow, which is why it is impossible for the company to turn profitable in the long-run. Hence, I think investors should continue shorting SolarCity despite its 60%+ fall.

Conclusion

Clearly, SolarCity’s business model is not built to last for the long-term. Given the increasing debt and interest expenses, SolarCity will soon run into trouble. Although the stock is down over 60%+ year to date, I think investors can still consider shorting it as SolarCity’s business model is unsustainable. I think the SolarCity’s shares will be worth about $5 by the first quarter of 2017, which is why I think investors can still short the stock.
Published on Mar 2, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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