Shares of SolarCity (SCTY, Financial) have rallied hard over the past few weeks and are now up almost 100% from February lows. Shares jumped almost 8% after San Francisco passed an ordinance requiring solar panels be installed on new small and midsized residential and commercial buildings. Since California is SolarCity’s largest market, the stock rallied.
Despite the recent rally, investors should be cautious. I expect SolarCity to tumble after it reports its earnings next month.
What are the analysts expecting?
For the coming quarter, analysts are expecting SolarCity to report EPS loss of $2.34, compared to a loss of $1.52 in the year-ago quarter. On the revenue front, analysts are anticipating sales of $108 million, up roughly 61% from the corresponding quarter of the previous year.
While revenue is expected to grow substantially, investors should also look at the EPS number. The company is losing more money as it grows; as I have said time and time again, its business model is unsustainable.
Borrowing rates
The primary reason why shares of SolarCity have rallied over the last two months is that the borrow rate is being manipulated higher to compel the shorts to cover their positions. Given the ridiculously high borrow rate of SolarCity, investors are finding it difficult to short the stock despite its horrible business model.
That being said, SolarCity can’t continue moving higher just because of short covering, and the earnings report should put a dent in the recent rally.
Rally was irrational
SolarCity rallied on the San Francisco news; however, investors shouldn’t get too excited as the ordinance will not benefit SolarCity much. There are hardly any new houses being built in San Francisco and given that the city is running out of space to build new homes, the ordinance will not have a considerable positive impact on SolarCity in the long run.
Conclusion
While shares of SolarCity have rallied, primarily because of increasing borrowing rates that have led to short covering, the upsurge won’t last. SolarCity is expected to report its earnings next month. I expect the company to continue growing its losses, which will remind the market that the company’s business model is not sustainable. My price target for SolarCity is still $10, and investors should short the stock just before the earnings as the chances of the stock crashing after the report are very high.
Disclosure: The author doesn’t have any position in the stocks mentioned in the article.
