Shares of SolarCity (SCTY, Financial) are trading near 52-week lows. SolarCity was pummeled by investors this week as the company slashed its installation guidance. SolarCity installed 256MW of solar systems in Q3, slightly below the guidance of 260MW. The company expects Q4 guidance to come in the range of 280MW to 300MW of installations. That takes the total to full-year installations of 878MW to 898MW, below prior guidance of 920MW to 1GW. As a result, the Street punished SolarCity’s share to the tune of -18% in one trading session.
SolarCity may be trading at 52-week lows, but the stock may be a value trap that investors should not buy. The company is already struggling with installations and things will likely get worse for the company going forward. Hence, I would recommend investors to sell the stock.
The primary reason why SolarCity is a sell is the expiry of the Investment Tax Credit. The Solar Investment Tax Credit is expected to expire for residential and commercial solar installations by the end of 2016. This means the tax credit for residential solar will go down from 30% to 0% and from 30% to 10% for commercial installations.
Since the inception of ITC in 2007, solar companies have benefited greatly from it as installations have sky-rocketed by 1,500% in the reference period. But with ITC expected to expire in the coming months, the solar installations will take a huge hit. SolarCity is already struggling with installations as the company slashed its guidance this quarter, and the expiry doesn’t come at a good time for the company.
Expiry of ITC will make the installation of solar panels very expensive and not feasible for many residential and commercial users. Reducing costs have been a great driver for the solar industry. However, the expiry of ITC will make the installation less economical. Due to the end of ITC, installation prices for solar panels can increase roughly 40% for residential solar and by 20% for commercial solar.
SolarCity’s business model relies heavily on ITC as the company leases solar panels to users that the company uses to generate revenue for years. Without ITC, SolarCity’s business model of leasing solar panels will crumble and it will witness a large decline in installations. With SolarCity already struggling with installations, the expiry of ITC will not help the company’s cause. As a result, I would recommend investors to stay as far away from the stock as possible.
Conclusion
Despite the headwinds, SolarCity is trading at a premium valuation. The company has a market cap of over $2.72 billion. It is impossible for the company to sustain this market cap without ITC. Furthermore, the company has been reporting losses consistently and has a trailing loss per share of 69 cents. The stock may be beaten down, but the slowdown in growth points toward further pain in the future. SolarCity looks like a value trap to me and thus, I reckon it would be wise for investors to sell the stock despite it being near its 52-week valuation.
