SolarCity (SCTY, Financial) is set to release its quarterly report after the bell Monday, and longs should be cautious heading into earnings. I recently recommended shorting SolarCity after the stock rallied to over $30, saying that its manipulative rally would reverse course after the earnings report.
However, SolarCity’s shares have fallen a lot sooner than I expected as it is now trading at around $21. Although SolarCity has taken a beating over the last few trading sessions, the stock is still highly overvalued and a short contender. Due to the expensive borrowing rate, investors can consider buying put options heading into the earnings report.
I recommended buying short-term put options heading into Chipotle Mexican Grill’s (CMG, Financial) and Fitbit’s (FIT, Financial) earnings, and both the stocks plunged substantially afterward. Since I am more bearish on SolarCity and expect the stock to trade under $10 within 12 months, investors should buy put options. Moreover, SolarCity is extremely volatile around earnings, and it dropped over 25% the last two times it reported a weak quarter.
Estimates
Analysts are expecting SolarCity to post a loss of $2.31 per share on revenue of $108 million. Although SolarCity’s revenue is expected to grow by more than 60% year over year, I am bearish on the stock due to its unsustainable business model.
SolarCity’s debt and expenses have grown faster than its profits which is why the company pays almost all of its gross income in debt expenses. Adding up all the other expenses, it is no surprise that SolarCity loses such a considerable amount of money every quarter.
That being said, the wide losses make the business unsustainable in the long run, which is why I am bearish on the stock. While the rate for borrowing SolarCity’s shares is high, investors can be certain that the stock will crash after the earnings report. Growing interest expense will prevent SolarCity from ever turning profitable, which is why I am bearish on the stock heading into earnings.
Conclusion
Growing interest expenses will continue putting downward pressure on SolarCity’s bottom line. The company is already losing tons of money every quarter and its path to profitability is uncertain to say the least. Given the volatility of the stock around earnings report, I would suggest investors buy put options before the company reports.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
