Elon Musk Can’t Save SolarCitySCTY), I have seen many investors who claim that they are long on SolarCity only because of Elon Musk. While I think Musk is a genius, I don’t think SolarCity deserves a premium valuation just because of him.
SolarCity’s growing losses paint a grim picture of the company’s future, and I don’t think even Musk can prevent the stock from going lower. The solar industry is a very volatile space. Readers who have been following my articles know that I never suggest buying highly-leveraged companies in the solar sector.
Due to the extreme volatility, I only like companies that have a proven record of profitability, which is why I am not a big fan of SolarCity. Although SolarCity’s sales have grown at a rapid pace, the company has burned through hundreds of millions of dollars of cash and does so every year.
SolarCity reported its first quarter earnings earlier this week and missed the EPS estimate. What’s worse is SolarCity’s guidance was also very weak as it expects wider losses and slower growth in the next quarter. Clearly, SolarCity is heading down the wrong road as it cannot continue burning through cash forever.
For investors who are not familiar with SolarCity’s business model, a potential customer who wants to have a solar panel installed needs to sign a 20-year lease with SolarCity on a fixed, growing price schedule.
Hence, by locking in a client, SolarCity is creating a revenue stream for over 20 years. 20 years of consistent revenue may seem like a great business model, but there’s more to it. SolarCity’s towering interest expense takes up a massive portion of its gross profit, thereby making the business unsustainable.
Even if SolarCity was to shut down all of its operation tomorrow, thereby generating pure profits from its existing clients, it would still not be profitable due to the interest expenses. I don’t see how Musk can turn around the sinking ship. Musk has been wrong about SolarCity in the past as he increased his position in the company by buying more shares the last time they crashed after weak Q4 earnings, and I don’t expect him to turn this around.
I don’t like SolarCity’s stock, however, I would strongly advise investors against buying the stock just because of Elon Musk.
Published on May 12, 2016By Prudent Investor