For the third time in a row, SolarCity (SCTY, Financial) reported quarterly earnings that were terrible and caused the stock to plunge more than 20%. Despite the company slashing guidance and reporting wider-than-expected losses, SolarCity has regained all of its post-earnings loss and is now trading higher than it was before the earnings release.
I have been skeptical of SolarCity’s rally in the past and have been recommending investors to short the stock since it was trading over $30. However, since borrowing rates for SolarCity are too high, shorting the stock is a little too expensive.
For this reason, before heading into earnings, I penned down an article recommending investors buy put options on the stock and cash in on their gains immediately after earnings. My thesis has played out perfectly as SolarCity dipped over 20% and has since recovered.
The rising borrowing rates have been fueling the SolarCity rally. But, like many times in the past, the rally will not last long. SolarCity’s business model is still a mess and the company’s expenses and debt are growing at a rapid rate. To make matters worse, SolarCity’s guidance for the upcoming quarter was also way below the consensus.
Although SolarCity has managed to report stellar revenue growth, investors should focus on the company’s profit-generating power and ignore the revenue growth. Since SolarCity’s interest expense is almost equal to its gross profit, I don’t see how the company can ever turn profitable.
SolarCity’s rally is a dead cat bounce that makes no sense. Given the awful results, SolarCity should have tested its 52-week lows, but the stock has risen over 30% since then. Since I don’t expect SolarCity to move much lower in the next two months, investors should not try to short the stock right now. Due to the high borrowing rates, it will only make sense to short SolarCity before the earnings release.
Conclusion
Growing debt and interest expenses make it impossible for SolarCity to report a good quarter. But since the borrowing rates are high, investors have to time the stock’s decline. Investors should only try to short or buy put options a few days or weeks before SolarCity is scheduled to report its next quarterly results. Given the trend of more than 20% declines post-earnings, betting against SolarCity heading into earnings is a safe option.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
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