I Thought SolarCity's Business Was Terrible, but It Just Got a Lot Worse

I have said it time and again in the past that SolarCity (SCTY) is a terrible business. The company is losing tons of money every quarter and I don’t see how it will ever turn profitable. Although I have recommended investors to be on the long side of the SolarCity trade in the recent past, my long-term view of the company has been extremely bearish. In fact, as my readers would know, I have had a long-term $5 price target on SolarCity.

All in all, SolarCity has been treading the same path as SunEdison (SUNE) and I didn’t think the company could get any worse, but I stand corrected.
Earlier this week, SolarCity soared after Credit Suisse talked up the initiative of solar loans. Credit Suisse’s Patrick Jobin said, “there are genuine advantages to both homeowners and the residential solar development companies" in a shift from solar leases to solar loans, even if "ultimate value creation could be half the potential value realized under the leasing model."

Following Jobin’s statement, SolarCity jumped over 8%. However, as highlighted by Jobin’s statement itself, the switch from leases to loan will further hurt SolarCity in the long run. As Jobin highlighted, the loan based model will create “genuine advantages” for both homeowners and residential solar development companies. The advantages will surely lead to more losses at SolarCity, but will help its revenue growth. As mentioned above, Jobin himself admitted that the "ultimate value creation could be half the potential value realized under the leasing model." Given that SolarCity loses tens of millions of dollars every quarter already, giving more advantages to end-users will be harmful to the company in the long-run.

So, the question is, why would SolarCity’s management switch to solar loans if it is less profitable? The answer to it is probably simple. Despite SolarCity’s abysmal business model, the only thing keeping the stock up is its strong revenue growth (And maybe the presence of Elon Musk). The solar loans, which will give the customers some advantages will obviously lead to stronger revenue growth. However, those advantages will come at the cost of SolarCity’s profits.

The strong revenue growth will keep investors blinded from the fact that company will never be profitable. And in the meantime, the company’s insiders will be cashing out their equity compensation for as long as possible.

Hence, I would advise investors to not be blinded by SolarCity’s revenue growth. After the announcement of solar loans, even my $5 price target looks very lenient and I think investors should short the stock after the unfathomable rally.
Published on Jun 8, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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