SolarCity (SCTY) posted a mixed performance in the third quarter. But for momentum plays — as solar stocks like SCTY have been this year — mixed news is bad news.
In early trading today, SolarCity earnings sent SCTY stock is down around 13%. Of course, SCTY stock has been one of the hottest solar stocks so far this year.
Let’s take a look at why investors are selling SolarCity stock shares.
Why Investors Are Selling SCTY Stock
SCTY, which is a top installer of solar panels, reported revenue of $48.6 million in the Q3 SolarCity earnings report. That’s a hot gain of 52% and beat estimates of SCTY sales of $42.7 million.
Adjusted SolarCity earnings also came in 43 cents per share of SCTY stock in the red — narrower than the 48 cents expected. In top of that, SCTY boosted its capacity by 111% to 78 megawatts.
But what really weighed on SCTY stock was the SolarCity earnings guidance. For the fourth quarter, SCTY expects a loss of 55 cents per share to 65 cents per share. Yet the Street was looking for a loss of only 47 cents per share.
Something else: Investors are also getting concerned about capital expenditures for SCTY. They almost doubled during the past year, hitting about $217 million. This compared to operating cash flows of just $100 million.
Of course, SCTY does have an innovative business model — especially compared to other solar stocks. The company installs panels for free for customers and then requires payments on a long-term lease (usually over a 20-year period). Currently, the contracted payments amount to about $1.74 billion for SCTY.
But to make the business model work, SolarCity needs to raise large amounts from Wall Street, which can be dicey sometimes.
Another factor that investors like about SCTY stock: The chairman is Elon Musk, who is the mastermind behind Tesla (TSLA). When it comes to pioneering new technologies, he seems to have the Midas Touch. By the way, he owns 73% of SCTY stock.
Still, SCTY stock has been a playground for momentum traders — as seen by its gains of over 300% this year. That kind of run means whenever there is bad news, the response can be brutal.
Sure, lots of solar stock have posted similar outsized gains … but most solar stocks were recovering from a brutal downturn in 2011. SCTY stock, on the other hand, just came public in Demember. Since then, the return is almost 650% … which puts the price-to-sales ratio at a nosebleed multiple of 37.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.