Shares of SolarCity (SCTY, Financial) crashed substantially when the company reported its Q4 earnings last month. Since then, however, SolarCity has staged an impressive turnaround and has shot up almost 60% from its 52-week lows. While the market-wide rally has contributed to SolarCity’s surge, shares have also been propelled by the rumors that Tesla (TSLA, Financial) CEO Elon Musk may be interested in buying the company out.
I have always advised investors to not buy a stock based on a rumor, and in the case of SolarCity, I think the rumors are a sham and the stock will continue its decline once investors focus on the problems that the company is facing.
Déjà vu
SolarCity has been reporting terrible earnings for quite some time and the previous quarter was no different. SolarCity’s Q3 report was terrible and the stock crashed over 30% following the report. Even back then, SolarCity staged an impressive recovery and the shares reversed their downtrend due to the fact that Musk increased his position in the company.
Although insider buying did propel the stock higher, it came crashing down again and lost almost 70% of its value in the next few months. Hence, it's not wise to buy SolarCity’s stock just because of a potential buy out.
If Musk really wants to buy SolarCity, he can probably do it at a lot less value as I think shares of SolarCity are massively overvalued at this point in time. With the company bleeding money and debts growing, SolarCity is a disaster waiting to happen.
The company’s business model does not look sustainable and shares will eventually start falling again. Growing interest expenses will continue hurting SolarCity’s margins, and the company may never become profitable.
Investors need a better reason to buy SolarCity than a rumor. And right now, I don’t see any positives for the company and would suggest investors to use the rally to short the stock.
Conclusion
SolarCity’s debt is growing at a rapid pace, and the company is also losing millions of dollars every quarter. The company’s interest expense eats up a large portion of its cash flow, and its business model is clearly not sustainable in the long-run.
SolarCity is a ticking time bomb and investors should not buy the stock on the hopes of a buyout. If Musk really wanted to buy out the company, he can do it for a lot cheaper as I think the fair value of SolarCity is $10.
