The Worst Solar Stock

| About: SolarCity Corp. (SCTY)

Summary

In this article, I give several reasons why SCTY is a solid short.

In addition to my original thesis on the stock, I have provided three other important problems that SCTY will have to overcome to stage a comeback.

After giving away its cash flow, SCTY sees itself as a fish without a safety net and in an increasingly violent pond.

In my last article on SolarCity (NASDAQ:SCTY), I gave my main hypothesis as to why the company is following the SunEdison (OTCPK:SUNEQ) path. Many disagreed with my thesis, which is fine. However, even if you disagree with the idea that SCTY is giving away its cash flow while keeping the debt, you should at least agree with one of the following points.

In this article, I give several reasons why SCTY is a solid short. If you agree with even one of these reasons, SCTY should be at least a short candidate. Remember, you can always safely short a stock through stock options.

Sales Costs Have Doubled

Solar panels used to be a much easier sell. However, over the past few months, SCTY has seen their sales costs skyrocket from $0.54 per mw to $0.97 per mw. For any other business, a doubling in the sales costs would equal a huge problem, but SCTY investors see this as a temporary headwind.

Why do they view it as so? Seasonality certainly isn't a possibility, it being summer. And the price of oil hasn't suddenly fallen this quarter - it has been down for quite a while.

I see no other explanation than the fact that consumers simply are not interested in buying solar panels at the moment. Increasing sales efforts is merely eating away at the little cash SCTY has left. The best tactic is to take a step back, not push forward hoping for more sales at the expense of ROI.

Government Subsidies Are Falling

Elon Musk, clearly a smart man, sees his main criticism coming from investors who claim his businesses live off government subsidies and not true growth. We shall soon see, as subsidies for SCTY are declining. Take the newest hit in subsidies, for example: SCTY's funding in Buffalo has been slashed.

Already negative in both cash flow and in growth, SCTY now faces a strengthening headwind (or weakening tailwind) in the form of lessened subsidies for solar power. This makes the product more expensive for the consumer, and in turn, makes sales, which have already increased in price, more expensive.

The Solar Market Is Already Crowded

The disappearance of SUNEQ aside, the solar panel market in the US is saturated. Applications received on the part of SCTY is at half of what it was at the peak, in summer 2015. Oddly enough, despite this saturation, SCTY's competitors continue to gain market share.

SCTY's market share peaked in August of last year but has since dropped by 34%. In contrast, competitors Sunrun (NASDAQ:RUN), Vivint Solar (NYSE:VSLR), and SunPower (NASDAQ:SPWR) have grown by 120%, 50%, and 25%, respectively. In an industry that seems to be growing, why would SCTY shrink? Stronger competition and a lack of governmental support shows that SCTY has problems standing on its own legs.

Conclusion

In addition to my original thesis on the stock, I have provided three other important problems that SCTY will have to overcome to stage a comeback. Unfortunately, being a leader who is losing market share while others gain market share, the loss of government subsidies, and an increase in sales costs are not problems easily overcome. For the sake of SCTY investors, I wish I could say these are temporary headwinds, but the fact is they add to the increasingly obvious trouble SCTY is finding itself in.

After giving away its cash flow, SCTY sees itself as a fish without a safety net and in an increasingly violent pond. Fundamentally, SCTY is a strong short. For risk-averse investors, SCTY puts are on sale - $700 allows you to mimic shorting 40 shares of SCTY until October:

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.