Holding SolarCity Makes Zero SenseSCTY) have yielded triple-digit returns in just a few months. The company has a habit of crashing after earnings report and somehow recovering from it in the weeks following the earnings date.
Now that Tesla (TSLA) is planning to bailout SolarCity, investors are not left with the option of benefiting from this trend. Tesla is expected to buy SolarCity for around $26 to $28.50 and with SolarCity already trading at $27.5, the upside at these levels is very limited.
The acquisition was the best case scenario for SolarCity longs as the company’s business model was not sustainable and SolarCity would have been bankrupt in the years to come.
Due to its terrible business model, SolarCity often reports terrible earnings. Hence, if the acquisition isn’t closed before the earnings report, SolarCity may head considerably lower. Moreover, if investors vote against the acquisition, SolarCity could crash to under $20 in no time.
Investors are probably buying SolarCity or call options in the hopes of a raised bid for the company. However, given the company’s terrible business model, I am surprised that it is being offered $28.50. Elon Musk probably bailed out SolarCity to save his reputation as a revolutionary. SolarCity going bust could have had a negative impact on Tesla, which is probably why Musk decided to buyout the company.
While the bailout was lucky for SolarCity investors, it is time to dump the stock as the upside at current levels is pretty limited. The company’s interest expense is more than its gross profit, which thereby makes the business model unsustainable in the long run.
The acquisition is obviously a terrible move for Tesla since the company is already bleeding money. However, for SolarCity investors, this would be the ideal exit point.
SolarCity, on its own, would not have survived, which in turn would have tarnished Musk’s reputation. However, by bailing out SolarCity, Musk is buying himself some more time. SolarCity investors should look to sell the stock at current levels as the chances of it moving any higher are pretty limited. Moreover, if the acquisition does not go through, SolarCity’s shares could crash to under $20 in no time. Hence, I think SolarCity is a strong sell at these levels.
Disclosure: No position
Published on Jul 27, 2016By Ayush Singh