SCTY Stock: Is Billionaire Jim Chanos Right on SolarCity Corporation?

SCTY StockThey laughed when billionaire Jim Chanos started betting against SolarCity Corporation (NYSE:SCTY). But with shares of SCTY stock crashing, they’re not laughing anymore.

SolarCity has beaten analyst expectations for the third quarter on both revenue and losses, albeit the beat on losses ended up farther on the negative side. SCTY reported a $2.10 loss per share for $113.9 million in revenue.

The results obviously weren’t enough to impress stockholders. SCTY stock took a nosedive after the announcement and has since been crashing. More than the third quarter, it’s the fourth quarter outlook and beyond that has SCTY stockholders worried.

SolarCity has been reaping benefits off of government tax credits which are expected to expire in 2017. In order to prepare itself for the dreaded years ahead, the company says it’s planning to cut down on its expansion costs which will also stall growth. After having been repeatedly bashed in the media for burning cash, the company is finally planning to go cash flow positive by 2017. How it is going to do that, however, remains a mystery thus far.

scty solarcity corp stock chart

Chart courtesy of

Down already over 22%, the biggest loser from the stock crash is obviously the biggest SCTY stockholder, Chairman of SolarCity and cousin of SolarCity founders—Elon Musk. But billionaire Jim Chanos, who made a short call on SolarCity in August, had already seen it coming.

Billionaire Jim Chanos, who is famous for his spot-on short bets, had gone as far as calling the company a “subprime financing company” which essentially leases out solar panels to its customers who end up buying into what is typically another mortgage. And there is no guarantee these customers will continue to pay, since their credit risk is not strictly gauged. The company could any day face payment defaults. Chanos rightly pointed out that the costs of solar energy will continue to go down over time and those who’ve leased at current high rates will only regret later.

Our country has shown a long-standing commitment to renewable energy during President Obama’s tenure in the oval office. Going forward, the future of solar in the U.S. may depend, in part, on Capital Hill’s renewed policy under the next President. However, the solar industry is largely predicted to see a massive growth in the coming years. So it’s not all doom and gloom for solar stocks. According to a research, the global market for photovoltaic solar cells is expected to triple by 2020 to almost 700GW, as the costs of PV cells continue to head south. (Source: “Global PV Demand Outlook 2015-2020: Exploring Risk in Downstream Solar Markets,” Green Tech media, June 2015.)

The Bottom Line on SCTY Stock

SolarCity is essentially a residential solar company. Its lower guidance for the next quarter citing uncertainty on future commercial sales is a confirmation of its penetration problems in the bigger market.

It remains to be seen which companies grab the most market share in the U.S. and especially in the emerging solar-powered countries like China, Mexico, Malaysia, and India, to name a few. But it’s definitely not going to be SolarCity whose narrow scope remains focused on the U.S. residential market.

Chanos’ concern that the company is burning a lot of cash has a huge debt burden and negative earnings are all correct. It wouldn’t surprise me one bit if SCTY stock falls under $15.00 in the coming years.

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