SolarCity down, good time to buy

We have been having quite successful last week in terms of our short and long calls in solar energy. One of our favorite all time shorts SolarCity finally fell near its all-time lows. The stock which is linked to Elon Musk and Tesla saw its stock price decline by 20%, after the company reported bigger than expected losses and also lowered its growth targets for the upcoming quarters. Note, investors have been growing more skeptical of debt-run loss making solar companies in recent times. SunEdison has been punished heavily after the company took upon large amounts of debt for turbo fueled expansion of its capacity and entered new segments.

Our other top solar stock price SunPower saw a very good quarter in comparison with stock price jumping up due to better than expected results. First Solar too saw good results. While we had been short First Solar at the same time as SolarCity, we had changed our stance in the last few quarter to neutral. First Solar’s CdTe technology has been performing much better than our expectations and keeping its own compared to the mainstream silicon panel technology. We had expected that Cd-Te technology would get junked like other thin film solar technologies, as silicon panel technology improves due to massive investments and sharp growth being seen. While First Solar is the only company investing in CdTe technology, there are literally hundreds of companies focusing on silicon panel innovations besides major solar equipment manufacturers. First Solar has been surprisingly showing improvement almost every quarter and now its solar panels compare with multi-crystalline technology in terms of efficiency, removing a major handicap faced by FSLR products. Its recent win of supplying 400 MW of solar panels to a major US EPC is a feather in its cap and shows that it is clearly becoming a force in the solar module segment.

SolarCity has been our favorite shorts due to the narrowness of its solar products and the high valuation. The company does not have the breadth of market segments and geographies compared to Sunpower, First Solar and others but used to have a higher valuation. It was also much newer with little in the way of differentiation. The association with Elon Musk had been one of the main reasons why the stock price remained so high for such a long time.

We think that SolarCity is slowly becoming a buy but the stock price has further to fall. The removal of the US ITC in 2016 end will act as a major dampener for the stock. Note SolarCity just sells solar systems in the USA and mainly to the residential segment. The economics will deteriorate with the ITC going away.