I'm a long time SolarCity (SCTY) bull. I have written very bullish articles about SCTY in the past, both in March 2013 with SCTY trading in the $18 range. In my first article I discussed several reasons I believed SCTY would be moving up soon including its unique and attractive business model, its guidance and rapid growth, insider buying, short position and short ratio, and IPO fever. In my second article, I focused mostly on management confidence and outlook. Since my articles, SCTY has run as high as $52.77 per share, nearly tripling in value in just two months. While I still think the future for SCTY is bright, that's just too much, too far, too fast, and it has me nervous.
62 Million Shares Unlock On June 10
On June 10, 2013, 62 million shares will hit the 180-day lockup expiration. With SCTY shares up as much as over 500% in 6 months, it's hard not to fear whether this will be an avalanche of shares to be sold, as billions of dollars in trading value appear overnight. Add to that all of the selling from investors out of fear of the unlock shares, and there could be a downward spiral situation.
Valuation Versus First Solar
Part of the reason SCTY began to run was due to First Solar (FSLR) having its run. SCTY at its recent peak sported a $4 billion market cap, very close to FSLR's current market cap. There's a bit of a valuation gap between the two, however. FSLR is extremely profitable, extremely cash flow positive, and has a very high amount of shareholder equity per share (trades a little over book value). FSLR has billions in highly profitable sales while SCTY barely had over $100 million in sales last year while continuing to post huge net losses along with a tiny book value.
Bearish article coming soon
Author Copperfield Research has pre-announced its intention to release an article exposing material accounting irregularities and conflicts between press releases and SEC filings. In the past, this author has had success in exposing companies with some of the best bearish analysis I've ever seen from an author, many times having at least a short-term dramatic effect on stock prices and long-term negative exposure, which in this case sounds like it could be fertile ground for the authorities. By fertile ground, I mean if the implied allegations of accounting irregularities prove to be credible, it could open the door for financial restatements and in turn possibly spark an SEC or DOJ investigation. No details have been released yet so it remains to be seen even how serious and credible the allegations even are, but the report is due any moment.
SCTY no longer reporting backlog
From the latest conference call:
Firstly, I'm not a big fan of the backlog metric. The backlog metric is a metric that we actually want to bring down, not go up. Our long-term goal is to get it down significantly and eventually get to a point where we can install solar the same amount that we sell it. So going forward, we're actually going to stop reporting our backlog number. We don't like the metric, we want it to come down. And instead of reporting the backlog number, we'll report our bookings for the quarter.
One word comes to mind: huh? What does management have to hide? We investors are big boys and girls. If you want to downplay the importance of the backlog number, just do so, but not reporting seems a bit strange, at best, and gives me pause and concern if there's something they're not telling us.
While I still like the company itself, I'm nervous about SCTY at this price at this time and have begun taking profits. Not only does SCTY seem fundamentally overvalued here, but a number of short-term catalysts for a drop are evident as well as a number of my originally bullish thoughts are no longer valid such as the short interest ratio (now not even relevant - the squeeze already happened) and insider buying has ceased as just two examples. I believe SCTY is a sell for now.
Additional disclosure: By the time this publishes, I may have sold the rest of my SCTY and possibly even went short.