SCTY Stock: Why SolarCity Corp Stock Crashed on Thursday

SCTY StockInvestors Turn Bearish on SolarCity Stock

SolarCity Corp (NASDAQ:SCTY) was dragged into the spotlight this year when Elon Musk, the biggest holder of SCTY stock, made a move to acquire the company using his other firm, Tesla Motors Inc (NASDAQ:TSLA).

The proposed merger struck many observers as a transparent ploy to bail out SolarCity stock from a death spiral. Investors were growing skeptical that the rooftop solar provider could ever reach profitability. As a result, SCTY stock took a beating from the market.

But then Tesla Motors came swooping in with a generous acquisition offer. Since he sits on the boards of directors for both companies, Elon Musk recused himself from voting on the deal. Nonetheless, it was approved on both sides, and SolarCity stock rebounded.

Investors bought and sold SCTY stock until the price rested within Tesla’s target range, but SolarCity stock has since taken a dive. New details about the merger have cast a shadow across the proceedings (namely a $422.0-million payout to bondholders).


Investors didn’t take the news well. SCTY stock fell more than nine percent on Thursday, ending the trading session at $18.78. This is extremely odd, considering that Tesla’s new offer still values each share of SolarCity stock at $24.16.

What’s going on here?

Why SCTY Stock Crashed

There are two reasons, and one of them is downright weird. SolarCity stock was originally valued at a cumulative total of $2.8 billion in June, but the price tag fell to $2.4 billion since then.

The offer was lowered because SolarCity’s ability to raise money dried up after creditors heard about the buyout offer. Lenders “appeared to be delaying funding,” specifically because of “the announcement of the Tesla proposal.”

This meant that SolarCity’s cash reserves took a hit, as did its expansion plans. Tesla used the lowered guidance as a pretext for cutting the offer price for SCTY stock, but there was one thing that no one knew: SolarCity’s bankers had accidentally undervalued the company by double-counting a $400.0-million piece of debt. (Source: “5 Things We Just Learned About the Tesla-SolarCity Deal,” Fortune, August 31, 2016.)

By overweighting the company’s debt, the bankers had accidentally lowered Tesla’s target range for SolarCity stock. Tesla had originally quoted a range of $15.00 to $34.00 for SCTY stock, but the correct data would revise that to $19.00 to $38.00. In response to this stunning mistake, Tesla just shrugged its shoulders.

My feeling is that shareholders won’t be so forgiving. The deal has yet to be approved by independent SolarCity stockholders and I’m guessing they won’t take too kindly to being lowballed. Remember that the firm can technically solicit other offers until September 14.

Why SolarCity Stock Could Rebound

The second reason is that SolarCity has a cash problem, but that’s only because of the publicity around a potential merger. Once that is settled, it’s back to business as usual. The entire point of the merger is to lower borrowing costs using Tesla’s reputation.

Estimates suggest the merger could bring $150.0-million-worth of costs savings, some of which Tesla is reportedly already putting in place. There are undeniable synergies in the two firms, but the cost of the borrowing aspect can’t be overstated.

At present, there are a lot of willing buyers of Tesla stock. There are also a lot of eager savers willing to lend the company money through bond purchases, meaning that Tesla bonds have a relatively low yield. It has what economists call “liquidity.”

SolarCity stock doesn’t command the same level of respect, particularly now that it is revealing a cash shortfall. By contrast, Tesla raised $1.7 billion in the second quarter and plans to raise more before the year is out. Investors are open-handed with Tesla.

That being said, even TSLA stock must pay its debts. At some time in the next two months, Musk intends to pay $422.0 million to bondholders, which I suppose would make room for SolarCity’s debt. (Source: “Tesla to Pay $422 Million to Bondholders, Raise Additional Funds,,” The Wall Street Journal, August 31, 2016.)

Regardless of the initial panic in markets, this may turn out to be a brilliant move. Markets may have turned sour if SolarCity’s debt was stacked on top of Tesla’s without any acknowledgement that this much leverage was unacceptable. It is possible Elon Musk was hedging that risk by paying the debt now. You have to hand it to the guy—he’s always 10 moves ahead of everyone else.

In any case, the bottom line is simple: Tesla is looking to buy SolarCity stock at $24.16, but the price is currently sitting at $18.78. The discount implies investors are pessimistic about the deal being approved, but they forget that seven other suitors could also buy SCTY.

From my vantage point, it seems inevitable that SolarCity stock will surge back to the mid-$20.00s. If you’re still confused about whether or not to be bullish on SCTY stock, I suggest you watch this incredible video. It shows that the next great investing opportunity is already right in front of you.