Kynikos Associates LP’s famous (maybe infamous) founder and manager Jim Chanos may be an annoyingly outspoken, self-serving pessimist, but he’s right about one thing: Solar panel installer and financier SolarCity Corp (SCTY) is in trouble, and it could finally crumble beyond repair in 2016 barring some dramatic changes in its current fiscal trajectory.
Fans and owners of SCTY stock are quick to argue that SolarCity is indeed adapting to the ever-changing solar power market, and besides, it’s a long-term business model anyway.
In light of the fact that no solar power business model has proven truly viable yet, though — and this goes beyond the implosion of SunEdison Inc (SUNEQ) — those SolarCity fans and shareholders may be holding on to nothing more than a dream.
Why Chanos is Betting Against SolarCity
Chanos didn’t pull any punches when he spoke with CNBC on Monday. He plainly said, “The problem with SolarCity is they’re losing money on every installation and making it up on volume,” predicting financial trouble would become debilitating for the company this year.
The outlook is an extension of a more detailed message Chanos delivered in August of last year, when he first disclosed his hedge fund held a sizable short trade on SCTY stock. He explained then:
“SolarCity is burning an awful lot of cash, hundreds of millions of dollars every quarter, has a lot of debt and has negative EBITDA. And in this kind of environment that is a very scary proposition. I mean, they are going to have to raise a lot of money in a model that I think has been passed over in terms of the more institutionalized and distributed model of solar.”
He’s not wrong. Not only is SolarCity losing money on a GAAP basis, it’s still losing money on a non-GAAP/operational basis. Those losses are getting bigger rather than smaller too, as the company scales up.
Up until early 2014, few investors cared about the then-current losses, as the business model of providing customer financing for its rooftop installations — called a power purchase agreement (PPA) — would presumably pay off in the future as costs of solar panels continued to fall and the size of the company’s revenue base expanded. But no arrangement of the debt-dependent business model appears capable of providing a positive return, hence the 73% tumble from SCTY since the Febraury-2014 peak.
Underscoring investors concerns are the sizeable increases in selling costs seen in the past couple of quarters.
SolarCity more or less hit the same wall SunEdison did. That is, the math doesn’t add up for consumers … at least not yet, and not the way solar power as a product is being made available to those consumers.
The Counterargument is Still Lacking
SCTY bulls push back against Chanos by pointing out how the company has readily secured funding from big-name partners who arguably wouldn’t bother if SolarCity’s business model weren’t the real deal. Namely, John Hancock has forked over $227 million to buy the rights to a swath of the solar power company’s future cash flow, and in early April, Bank of America Corp (BAC) along with an unnamed partner ponied up $188 million to fund solar power projects.
To be fair, it is an accolade, and a relief — SolarCity is mostly unable to fund its own large-scale projects as well as provide financing for its consumer installations.
Even so, the very fact that SolarCity is reaching out to third parties on a small, per-project scale rather than securing one massive line of credit is less than ideal. Should the investments being made by BofA and John Hancock end up going sour, SolarCity may find it difficult to find financing of any size again.
And don’t think for a moment Chanos hasn’t already thought of that.
In August, he deemed SolarCity a “subprime financing company” in that it sells rooftop systems to consumers with less-than-great credit scores.
Even if credit issues don’t become a funding challenge in the future, though, there’s still the little matter of a regulatory environment that’s increasingly working against the marketability of SolarCity’s business model. California threw up a proposed roadblock late last year, and Nevada’s attack on SolarCity has been plenty well-documented.
There’s more of the same regulatory headwind brewing all across the nation.
Bottom Line for SCTY
SolarCity has an earnings release slated for Monday. Investors aren’t hopeful, nor should they be in light of the disappointment they’ve suffered following the prior two earnings releases.
Sure, this time around could be different. The company could get something right and offer a glimmer of hope.
In the bigger picture, though, Chanos has the right idea. Much like SunEdison, solar power’s financial viability isn’t living up to the hype, regardless of how it’s being packaged up and sold.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
