Very Weak Guidance for Q3
SolarCity (SCTY) reported its earnings after-hours. Although it reported an increase in MW booked of 218 MW, which is up 216% when compared to Q2 of 2013, it also projected a significant increase in expenses and even wider losses.
SolarCity also reported its controversial "retained earnings" forecast increased to $1,804 million, or $1.72/W. This figure takes into account that clients will continue to pay SolarCity for an additional 10 years after the original 20-year lease term expires. Moreover, it does not include the cancellations from its backlog data, as that information is no longer disclosed.
As clearly shown in the numbers, SolarCity is growing, but it is growing at the cost of even greater losses. No business can sustain itself in the long run in a model that burns more cash than it generates.
Need for Additional Working Capital
Lyndon Rive, the CEO of SolarCity, stated there will definitely be a need for additional working capital. The company may decide to do another securitization deal, or as many companies ultimately do, potentially offer a secondary, which will dilute shares. Mr. Rive did not say anything specifically with respect to a secondary, nor would most any CEO on their earnings conference call, but at some point, that will be on the table if it cannot generate any other means of financing.
No Further Information Provided on Silevo Financing
As Ben Kallo, Robert W. Baird senior research analyst, stated during his CNBC interview, they still need to sort through the numbers, and they don't know how the highly costly Silevo project will be financed. Mr. Kallo further added "I do think it brings an element of risk." To say the least. As we know from its numbers, SolarCity has $0 reported for R&D, and it is still losing nearly a $100 million per quarter. What happens when it adds R&D expenditure for Silveo?
Investors should be concerned when such critical information is not disclosed. Many investors were hoping to hear more about how Silevo will be financed. Yet, no meaningful information was provided. It was glossed over, but its financing was not discussed. This should concern investors; as the old adage goes "where there's smoke, there's fire."
SolarCity continues to be a momentum-driven "bubble" stock that keeps going higher, primarily due to shorts covering. However, shorts covering cannot be the only major catalyst for a stock's price increase. A true growth company should produce actual net income at some point. Investors should be very cautious when a company produces higher revenue at an increasingly higher cost. Since its IPO in 2012, we have yet to see a positive net income from SolarCity, and it has no such projection even for 2015.
If I had a long position on this stock, I would definitely sell it at these prices. As for me, I continue to maintain my short position, and will do so until there is a major correction in this stock price.
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.