SolarCity Short Now Even More Attractive

Aug. 26, 2015 3:06 PM ETTesla, Inc. (TSLA)32 Comments
Contrarian Analysis profile picture
Contrarian Analysis
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Summary

  • The SolarCity short has gotten only more attractive over the past few months as momentum has gained.
  • Sunedison has shown how shown how fragile and fickle markets can be toward solar companies.
  • Jim Chanos has added institutional support and weight to the bear thesis.
  • Price target: still $0.

So congrats to everyone who went short SolarCity (OTC:SCTY) when I told them to around two and a half months ago to do so! You are all sitting on an approximately 25% gain! If you guys could send me some of that would be great too …

Anyways, I've been gone for a while and in the meantime, the SolarCity train apparently just does not stop, even in the face of huge losses. Besides Messrs/Missrs. Casual Analyst and Rogier van Vlissingen, every other author has been completely bullish.

I've made my case well enough, and you can read it here, if you have PRO. Everything I've said so far is still valid today, and will continue to be valid until I see evidence of economic value being created. However, I will add some new information, information that will hopefully convince some more people to at the very least get out of SolarCity.

First off, what has changed since my first article?

Most importantly, the Sunedison (SUNE)/Vivint (VSLR) deal.

Sunedison is the largest player in the alternative energy space. Sunedison develops and finances solar power projects for larger places such as stores or small factories that have to buy electricity at retail rates, even though they consume much more power. Basically SolarCity on a much larger scale, and with a yieldco.

Sunedison acquired Vivint to get in the residential space, which, if you disregard Vivint's complete overvaluation, was a sensible enough move. However, one has to ask at this point, why not SolarCity? The answer is, it's simply too expensive and big. SolarCity has an EV of $4.5B, about 3 times Vivint's which is too big for any player to just try and absorb. Vivint already had a distribution system in place, and Sunedison will bring the capital to help it catch up with SolarCity.

Sunedison's existing solar panel manufacturing capabilities will also eliminate the need for huge, capex-intensive manufacturing expansions that SolarCity is building, and provides synergies in from that perspective. If its project development business is underperforming, it can always use the residential business now as a release valve to dump any unsold panels.

Sunedison also has its yieldco in place as well, fully poised to receive the deals that Vivint lands through its residential solar business. In fact, Terraform put up around $900M to buy out the existing solar portfolio at Vivint, which will boost its yield by quite a bit so that value is created here as well.

However, even with the most logical acquirer, and the best comparable to SolarCity, value was evidently destroyed. The entire solar industry has seen the beating that SUNE has taken and obviously does not want to repeat it.

So what does this mean for SolarCity?

  1. No possibility of a buyout. SolarCity jumped around 10% when the buyout was announced, and this was obviously misguided. I personally took the jump to add to my position, so I was happy.

  2. Loss of investor confidence in the residential market. Many research analysts initially raised their target prices on SCTY until the true effects of what would actually happen with the deal dawned on investors. TERP was exposed to a high risk residential solar portfolio. SUNE bought a massively unprofitable business that was only going to get more unprofitable.

2. Secondly, the Jim Chanos short

Jim Chanos is a world renowned short seller, and manages around $2.5B in a purely short firm. His previous track record includes Enron, Tyco, and home builders. His latest bet is against SolarCity. He raises important questions about SolarCity that I have raised, although he didn't ask many more due to the shortage of time. I will elaborate on them down here.

  1. The fact that the "asset" is actually a liability

    1. Once again, let me reiterate: SolarCity OWNS THE PANELS. NOT THE CONSUMERS. So when you enter into a contract with SolarCity, you are essentially renting out your roof space to them for the difference in your utility bill.

    2. Because of that, it's not a very big savings, as they need their cut of the spread too.

    3. Because the poor sap homeowner is stuck with a contract, if they ever decide to sell the home, they need to get the next homeowner to agree to the terms of the contract. This has complicated or outright killed home sales before, and stands to become a much larger issue as more homeowners who entered into lease contracts try to sell their homes.

  2. SolarCity is a junk financing company

    1. I personally don't agree with this. There's nothing wrong specifically with SolarCity customers. I actually agree with the SolarCity CEO's response to Chanos' remarks, however, the overall thesis doesn't change.

  3. As solar is a dynamic new technology, costs are rapidly falling and new technology should easily surpass old technology.

    1. Newer technology is more efficient and cheaper; why would anyone commit to having higher prices with a panel that they don't even own?

    2. This doesn't even mention the fact that SolarCity leases have annual escalators built into them to raise the price of electricity, and over the course of 20 years, can add up to a very significant percentage of original costs. One sample contract I looked at had electricity prices moving to 26 cents a kilowatt hour, more expensive than utilities by far!

What this means for SolarCity:

  1. Major, high profile, institutional support for a SolarCity short. The announcement provided a lot of publicity to the bear side of the SolarCity trade, and the effects of that are already being seen, with the massive selloff after his talk.

  2. Harder to get financing to support the solar bonds and debt raises SolarCity needs to keep its growth engine going.

However, Chanos' comments missed the main point of the SolarCity bear thesis, which is that no economic value has even been created! 9 years of operating losses, coupled with the complete lack of barriers to entry, and the value destruction machine running at full speed in SolarCity make it a raging short. I still stand by the price target outlined in my previous article: $0.

Good luck to all the longs, I hope you haven't put any college funds into SCTY, and I'll see you on the other side.

This article was written by

Contrarian Analysis profile picture
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I've been trying my hand at investing for a long time and I'm just looking for an outlet for my views. I mainly go long, as I've been most successful doing that, however, I will go short if I see an extremely mispriced opportunity. I am contrarian usually, and am a long term holder.
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Disclosure: I am/we are short SCTY. 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.

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