SolarCity Corp (SCTY) is a potentially revolutionary company run by a man who has already had his fair share of revolutionary ideas. Until recently, however, the solar stock simply hadn’t gained much traction with investors.
But with short interest in SCTY drying up, perhaps that’s changing.
Short interest in SCTY stock declined over 10% in the recent reporting period and 24% since November, a good sign that bearish sentiment toward Elon Musk’s solar utility company is beginning to evaporate. As a result, SolarCity shares have gained about 30% since Feb. 11.
Why the suddenly renewed interest in SCTY?
SolarCity Sales Growth Strong
For one, solar stocks in general are on the rise, spurred by an extension of the solar tax credit here in the U.S. and productive global climate change talks in Paris in December. Those events have lifted the solar energy sector as a whole.
Bottom feeding is another reason. Solar stocks have been beaten down the last couple years, weighed down by flagging demand for alternative energy sources amidst decade-low oil and gas prices.
SCTY, for example, closed its first day public around $11 in December 2012 and rocketed to $84 in its first 14 months of trading. Then the bottom fell out, and the stock began a slow, painful, two-year descent, to as low as $16 early last month.
Now it’s on the upswing. And there’s reason to believe it’s not just a temporary rally that could fizzle at any moment.
To me, SCTY is a strong long-term play on the coming solar energy revolution for one major reason: cost. Customers, most of them residential, pay a lower price to SolarCity in exchange for a long-term (i.e. decades-long) contract to install photovoltaic solar panels on their roof and pay a monthly fee that’s less than what you’re paying your utility company.
Lately, SCTY’s sales have been soaring: revenues were $164 million in 2013, $255 million in 2014 and $400 million last year. Gross profit margins have also swelled to 30%, though the company is not yet profitable due to all the money it’s spending on growing the business.
Earnings or not, stocks of companies that grow revenues by more than 50% every year don’t typically stay down long.
Consider the trajectory of Elon Musk’s flagship company, Tesla Motors Inc (TSLA). Shares of the now-world-famous luxury electric carmaker didn’t budge a ton in their first couple years after coming public at $19 in June 2010. Before its mind-blowing run-up began in late 2012, the stock was still trading in the $27 range — a 42% return in two and a half years, half the return in SCTY stock (85%) in its first three-plus years of trading.
Most young companies have growing pains, no matter how revolutionary the idea. Tesla shares didn’t get going for a couple years despite strong double-digit revenue growth. (It still isn’t profitable, by the way.)
True, unlike Tesla, SolarCity doesn’t have a Model S in its pocket to wow the population — and, more importantly, Wall Street. But the stock has been so beaten down of late that now it’s on sale.
SCTY Stock Now a Bargain
At this point, most of the weak hands have been shaken out, as evidenced by the recent dropoff in short interest. Does SCTY have enough going for it to keep the bears at bay in the short term? I think so. Solar stocks still seem to have enough momentum, and another quarter of 60% (or more) sales growth would certainly help, though the company won’t report earnings again until May 3.
In the meantime, pay attention to next month’s short interest report; another decline would bode well. Keep an eye on the chart, too: if the stock falls below support at $18, then the bears have taken control again and it might be wise to sit on the sidelines for a while.
I doubt that will happen, though it’s hard to be sure.
What I am sure of is that if you’re looking for a stock to add to your long-term retirement portfolio, SCTY is an ideal candidate. It’s at the forefront of an industry that just received support from 195 nations across the world in the form of a signed accord. Its sales are doubling every two years, and eventually the company will become profitable.
And it’s run by one of the great innovators of the post-Steve-Jobs era.
There’s a lot to like about SolarCity. Perhaps the decline in short interest is a sign that Wall Street is starting to realize that again.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.