I Can't Believe I'm Saying This, but SolarCity Is a Buy... for Now

It has just been three weeks since I last recommended investors to short SolarCity (SCTY). In my article titled “SolarCity's Manipulative Rally Is About to Die”, I highlighted the fact that SolarCity’s recent upsurge, which was a result of manipulating borrowing rates, will not last long and the stock will crash after earnings.

I even recommended investors to buy put options as the borrowing rates were too expensive for shorting the stock.
SolarCity released its quarterly earnings yesterday, and for the third time in a row, the stock crashed over 20% due to terrible numbers.

Growing losses

Growing revenue has never been a problem for SolarCity. The company’s top-line growth has been very consistent and in the latest reported quarter, SolarCity reported sales growth of over 81% to $122.6 million, easily beating the consensus by over $14 million.

However, as I have said in the past, investors should completely ignore SolarCity’s sales growth and should rather focus on its earnings. For the quarter, SolarCity reported a loss of -$2.56 per share, widely missing the analysts’ estimate of -$2.31 per share.

Widening losses were not SolarCity’s only concern as the company issued a very weak guidance for Q2 as well. SolarCity expects EPS of -$2.70 to -$2.80, a lot lower than the -$2.23 consensus and revenues of $135 million-$143 million total, below consensus for $152.4 million.

Strong revenue growth was probably the only factor that was holding up SolarCity’s absurd valuation. However, with growth slowing down substantially, I have no doubt that SolarCity will be in the single digits in the next 12 months.

From the perspective of a long-term investor, I would say that SolarCity is still a short. However, the stock tends to recover from the post-earnings washouts, which is why I think investors should take their profits off the table and wait for SolarCity to recover before initiating a short position or buying more put options.

From a trader’s perspective, I think SolarCity is a short-term buy. The stock tends to rally substantially on the smallest of positive news. Due to the high borrowing rates, the short squeezes in SolarCity tend to push the stock a lot higher. So, while I think SolarCity will test its 52-week lows in the days to come, I will not be surprised to see the stock move towards $25 before the next earnings season.

Investors can decide to buy the stock if they want to ride the rally and sell it a few weeks before its Q2 earnings day.
Published on May 13, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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