Just over two months ago, shares of SolarCity (SCTY, Financial) were rallying.
I advised investors against buying the stock and claimed the rally would prove to be short lived. I cited the expiration of investment tax credit (ITC) and SolarCity’s poor business model as reasons to stay away from the stock.
However, just a couple of days after my article was published, an ITC extension was announced. As a result, solar stocks soared, and SolarCity continued its rally. Moreover, after SolarCity's terrible Q3 results, Elon Musk decided to increase his stake in the company which gave investors the confidence to buy into the rally.
Despite SolarCity’s rally, I was sure the stock would not be able to sustain its valuation due to its poor business model. And the rally proved to be short lived. SolarCity has been consistently bleeding money, and its debt is also growing, which is why I think the ITC extension will not matter in the long run. And as evident by SolarCity’s latest quarterly report, it doesn’t look like the company’s fortunes will turn around any time soon.
SolarCity released its Q4 earnings report earlier this week; as expected, the results were terrible. Although the company managed to beat the EPS and revenue estimates, the quarterly installations of 272MW, up 54% year over year, came in below the guidance of 280MW to 300MW. Installations for the next quarter are also expected to drop almost 35% sequentially due to the company’s decision to end Nevada operations. The company reported Q4 EPS loss of $2.37; although the number was better than analysts’ estimates, the losses were huge.
Loss-making companies continue to get punished amid the ongoing market correction, and SolarCity is no exception. Shares of the company dropped almost 30% following the Q4 results, and I expect the downfall to continue.
Given SolarCity’s business model, the company is not likely to turn profitable, which is why the stock will continue to be punished. With debt growing and losses widening, SolarCity will soon run out of money to borrow, and investors can even consider shorting the stock despite the selloff.
Conclusion
Shares of SolarCity are down roughly 45% since I recommended investors stay away from the stock. Despite the huge selloff, SolarCity has more downside to offer. The company’s debt burden keeps on increasing, which in turn results in millions of dollars lost in interest expense. Given that SolarCity is not expected to turn profitable any time soon, if ever, the stock still has considerable downside left. Investors should consider shorting SolarCity as it can still fall about 40%.
