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Should I Buy SCTY Stock? 3 Pros, 3 Cons

SolarCity is making for a great trade, but remains risky

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Cons on SCTY Stock

Zero Profits: Perhaps the biggest issue for SCTY stock and its shareholders is that it’s not yet profitable. Unlike FSLR and Canadian Solar (CSIQ), SCTY produced an adjusted third-quarter loss of 43 cents per share. While that is still an improvement from last year’s Q3 loss of $2.60 per share, a loss is a loss. What’s more troubling is that SolarCity has estimated it will also experience a loss of 55 to 65 cents per share of SCTY stock for the fourth quarter. Analysts also extrapolate that the negative EPS will stretch out into 2015. Consistent negative earnings does not make SCTY stock quite as appealing as an investment. Plus, investors can bet on a profitable (at least on an adjusted basis) Elon Musk enterprise with TSLA stock.

Difficult To Understand Accounting: As we’ve said before, SCTY isn’t like most solar stocks. While it does install solar panels, SolarCity is more like a bank than FSLR. That’s because the company uses asset-backed securities, variable interest entity investments, debt and tax credits/subsidies in order to create leases, notes and other items to generate its income and profits. Essentially, SolarCity has more in common with Bank of America (BAC) than it does with CSIQ. Given this fact, some have called this solar stock a “black-box” of accounting, and it’s very difficult to understand for regular investors. A good general rule is “if you don’t understand it, don’t buy it.” That can apply for SCTY stock.

It’s A Story Stock: Everyone loves a good story stock. Add billionaire playboy in Elon Musk and TSLA with a hot new technology and you can get momentum of epic proportions. The problem is that almost all story stocks fade away at some time. SCTY stock has been prone to these issues already. Shares of SolarCity stock fell nearly 15% when it reported earnings a few weeks ago. Volatility has been the general trend for shares of SCTY and the company tends to rise and fall rapidly. When the bottom falls out — either through another economic recession or another equity raising by the firm — SCTY could plummet big-time. That means long-term SCTY stock holders could be left holding the bag.

Verdict on SCTY Stock

So what’s the verdict on SolarCity stock? Well, it depends.

Yes, SCTY stock has been one of the best-performing solar stocks on the market today. Driven by increasing sales and a strong relationship with Elon Musk and TSLA, there are plenty of positives. However, some of the negatives at SolarCity are big red flags. Overall, SCTY stock is proving to be quite a risky investment.

All in all, SolarCity is making one heck of a trade. But investors need to understand what they are buying before adding shares of SCTY stock.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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