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Summary

  • SolarCity CEO Lyndon Rive stated they no longer expect to be cash flow positive for 2014. He added they will need additional working capital; a potential prelude to a secondary.
  • SolarCity decreased revenue projections for the 3rd quarter to $55,000,000 vs. the 2nd quarter which came in at $61,000,000, missing analyst expectations.
  • SolarCity increased their operating expense (OPEX) projections for the 3rd Quarter to $125,000,000 vs. $88,000,000 in the 2nd quarter.
  • SolarCity increased their projections of EPS losses to ($1.25) for the 3rd quarter vs. am EPS loss of ($0.96) in the 2nd quarter.
  • Between May 9th and August 4th, four (4) SolarCity board members had collectively sold 12,995,997 SolarCity shares.

SolarCity Needs More Working Capital - Secondary Offering?

SolarCity (NASDAQ:SCTY) management had previously stated their goal was to be cash flow positive for 2014. However, SolarCity CEO, Lyndon Rive, said that will not be the case during their conference call, which was captured by the transcript:

"In the past we've communicated our goal of being cash flow positive for the year, but in light of the opportunities ahead of us we're going to invest in customer growth, and - which is way better for the company."

Some investors may have missed the press release put out by New York Governor Cuomo's office on November 21st, 2013 when they announced Silevo, which wasn't bought out by SolarCity at that time, and another company Soraa, were planning to build a state-of-the-art anchor hub facility for high tech and green energy businesses at RiverBend in the City of Buffalo. This project was slated to cost $1.5 billion.

Silevo never started that project as SolarCity recently purchased Silevo for $201 million, and they are now in talks with Governor Cuomo and New York officials for completing the build out of the Silveo manufacturing facility.

The question remains, where will the $1.5 billion come from? Management didn't cover much about Silevo, other than what Mr. Rive stated during the conference call:

"Earlier we announced the Silevo acquisition and we expect it to close at the end of this month. We're in active discussions with the State of New York regarding the manufacturing site. Once we completed this process we'll be able to communicate our financing strategy regarding the manufacturing facility. We are super excited about the acquisition and what it can do for our total installed cost."

It is that very "financing strategy" Mr. Rive referred to that should concern investors. Will SolarCity issue a secondary offering? If yes, shares will be diluted and the stock price may drop significantly; almost as soon as they make any such announcement.

SolarCity Decreased Revenue Projections for Q3

The below is SolarCity's second quarter 2014 financial results revenue numbers as captured from their press release:

(click to enlarge)

As shown above, SolarCity had approximately $61,000,000 in revenue for the 2nd quarter of 2014. A growing company that is losing hundreds of millions of dollars each year, and has no positive net income projections even for 2015, must at least show a growing revenue trend. However, that is not the case with SolarCity. As shown below, they are projecting a lesser revenue for the 3rd quarter, than they generated in the 2nd quarter. The high end of their projection is only $55 million, which is almost 19% less than their previous quarter:

(click to enlarge)

When a growing company cannot clearly demonstrate growing revenues, and instead projects lesser revenues, investors should be concerned. The nearly 8% stock price drop captured this sentiment.

SolarCity Projects Higher Operating Expenses for Q3

As shown below, from their operations side, SolarCity had a little over $88 million in total net loss for the 2nd quarter of 2014:

(click to enlarge)

Yet, for the 3rd quarter of 2014 SolarCity is projecting their GAAP OPEX to be $115 million to $125 million, as show below:

(click to enlarge)

When a company reduces their revenue projections, and projects to increase their operating expenses by as much as 23%, investors should be concerned. Some investors expressed that concern on Friday August 9th when the stock price fell nearly 8%.

SolarCity Projects Higher EPS Loss for Q3

As show below, for the 2nd quarter of 2014 SolarCity had an EPS loss of ($0.96).

(click to enlarge)

However, they significantly increased their EPS loss projections for Q3 to ($1.15) - ($1.25). So SolarCity is projecting approximately a 24% increase in their EPS loss. This should concern investors. Please see their projection below:

(click to enlarge)

Four SolarCity Board Members Sold 12,995,997 Shares between May 9, 2014 to August 4, 2014

I study numbers and charts all the time. However, in my view there is no better indicator as to what fate awaits a company than when there is heavy insider selling.

Four SolarCity board members collectively sold 12,995,997 shares in less than a 3-month period, and all before the earnings report on August 7th. That number was huge. I went back and double checked the figures. I even added back the small acquisitions of shares these members had made, and including those small acquisitions there were 12,995,997 shares sold. Please see the breakdown below:

Board Member

Shares Sold

John Fisher

7,477,847

Nancy Pfund

529,009

Jonathan Shulkin

2,577,857

Antonio Gracias

2,411,284

In the last 90 days there were plenty of other insiders selling as well, including CEO Lyndon Rive, CTO Peter Rive, and General Counsel Seth Weissman.

Conclusion

Based on the above facts, in my view SolarCity is a strong sell. Board members are disposing of vast amounts of shares. Executives are selling large portions of their shares as well. For the 3rd quarter the company is projecting lower revenues, greater EPS loss, and greater operating expenses. Moreover, the company is openly stating they will need additional working capital.

In the very short term, we may see a price increase due to certain shorts covering, but it will ultimately amount to a bull trap. There is no substantial catalyst pushing the stock price higher, but plenty of catalysts, including these, that may drive the stock price lower.

Based on the above facts, if I had a long position, I would book profits as soon as possible. The stock price is grossly overvalued, highly volatile, and may face a huge sell-off. There is no reason to play "musical chairs with your money" as noted in this CNBC Fast Money interview. As for me, I am holding my short position.

Disclosure: The author is short SCTY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Why SolarCity Fell 7.26% And Why It May Keep Falling