We have written several articles about SolarCity (SCTY) in the recent past with thoughts about the solar industry, SCTY's strengths and about where it falls short. And specifically, about how the retained value of the company may be overstated significantly. (see here, here, here and here)
SCTY is a great company and we believe it has a bright future as a solar contractor. We, however, do not have faith in the stated value of the leases and PPA the company holds. We are not believers of the numbers being put out there in terms of retained values and future expectations. The assumptions behind the numbers seem like wishful thinking to us. We made our case and we stand by our assessment. So, what does this mean to an investor?
Here are our thoughts:
- If you are currently long SCTY or the derivatives, or considering entering a long position, now may be a great time to examine your thinking and see if SCTY's risk profile fits you.
- If you have no position and/or are considering going short, you may want to consider what the SCTY stock dynamics are and how long you can stay short.
Shorting is not our cup of tea and is not something that we believe most investors should even attempt. However, we understand there are investors and funds out there who have done well with short positions and know a thing or two about managing risk. For these folks, shorting SCTY may be a fair game.
SCTY is a momentum story stock partially riding on the coat tails of Tesla (NASDAQ:TSLA) and Elon Musk. The duration of this bubble is hard to forecast. However, we believe that SCTY management MUST face up to its obligations on guiding investors to reasonable expectations on retained value. And, currently SCTY's retained value assumptions make little sense. Maybe the management can help make sense out of the assumption or maybe they will have to adjust their assumptions to provide a more reasonable set of numbers. We believe the latter to be true and we also believe a 20% or more downward revision is likely. And, if and when that happens, the markets are unlikely to be kind to SCTY. So, if you believe the retained value numbers need an adjustment and if you believe you have the wherewithal to wait out the disclosures, then SCTY may be a viable short.
In the next article, we will be writing about what SCTY needs to do to dig itself out of this problem.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.