Don’t Move to SolarCity

This is a low-float story that could go horribly awry


Solar is dumb … as an investment, anyway.

Yes, someday technology will improve to the point where maybe — maybe — solar will pay for itself over time. Of course, it still will require enormous amounts of traditional fossil fuel energy to mine the silicon necessary to create solar panels, and to melt it — melting rock isn’t easy, by the way — and to keep panels from degrading in UV light. So that’s why I think investing in solar stocks as a true long-tern investment is dumb.

But today, I decided to look at a slightly different flavor in the solar sector, SolarCity (SCTY), to see what might be driving its stock performance.

SolarCity doesn’t actually manufacture solar materials; instead, it sells residential and commercial customers on buying their design and installation of solar energy systems. The company offers things like home energy evaluations and “energy efficiency upgrade products and services.”

SCTY also sells electricity generated by solar energy systems to customers, which is a racket I’d love to get into. “Here, I’m going to take advantage of your guilt and misplaced belief in the value of solar by selling you energy. This is the same exact energy you get from any other source, except because it’s green energy, I’m going to mark up the price.”

Oh, and it also markets and installs electric vehicle charging equipment.

With all due respect to the hardworking salesfolk at the company, this really just amounts to selling products to people that will only provide — at best — marginal savings over a very long period of time. That, plus the mistaken belief that it’s “better for the environment” (see excessive use of fossil fuels above).

But just as car salesmen say “There’s a butt for every seat,” I believe “there’s a green energy freak for every solar system.”

So, how is the business doing?

There are some pretty nasty macro headwinds involved. It’s not like SolarCity is the only company selling this stuff, which means pricing pressures remain in play. Still, SCTY’s revenues doubled from 2008 to 2010, before slowing to 8% in 2011 and 23% in 2012. Q1 revenues increased 50%, suggesting the company is ramping up sales again.

Yet all that revenue isn’t translating to profit. Cost of revenue plus SG&A expense puts the company solidly in the red. EBITDA is negative. SolarCity is showing net losses quarter after quarter.

And as this other intrepid reporter has pointed out, I’m not certain we can even rely on the company’s reported numbers.

So why is the stock soaring?

I’ll tell you why: There are only 29 million shares out there to trade. It’s low-float in a momentum sector.

Here’s my feeling on this as a long-term investment. Kevin O’Leary of ABC’s Shark Tank hates solar because it’s a bad investment. Mark Cuban’s mantra is that a business is only a business if it solves a problem. What problem does solar solve? None. We aren’t running out of energy, and it doesn’t save enough money to be viable.

This smells like a disaster of a company that will burn through its cash in no time. It has soared since its IPO, but the float is so low that shorting it is a dangerous game.

In other words: Just avoid SCTY.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at and follow his tweets @ichabodscranium.

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