Bulls vs. Bears: The Case of SolarCity (SCTY)

Jacob Harper |

SolarCity Corporation (SCTY) has nearly everything a tech company needs to succeed in 2013: it’s hip, it’s green, it’s got Steve Jobs 2.0 Elon Musk as Chairman. All that’s missing is a breathless write up in the New York Times and this tech company would be undisputed King of the Techs.

Investors have been taking notice, as the stock popped in mid-October amid reports by the company that they expected to significantly expand production in 2014. While the stock is currently outshining the competition, not everyone has always been convinced SolarCity  is the real deal: after its IPO in Dec. 2012 the stock encountered a wave of short-sellers, with 1.61 million short floated a mere two weeks after IPO.

While those initial shorters got burned, a new crop has risen, and the stock currently has a 20 percent short interest. Butstill the comapnys’ shares continue to ascend.

Both the bears and the bulls certainly have their case on this red-hot stock:

The Bulls Case

Increased Growth SolarCity is installing new panels at a continually faster clip. And once installed, those panels become steady revenue generators, supplying an assured flow of cash into SolarCity’s coffers. The company pegged installations to increase 80 percent in 2014, which would help support the company’s increasingly large valuation.

The Green Economy Solar stocks in general have fared well this year, with a renewed focus on green energy driving demand. While coal concerns like Peabody (BTU) continue to tank amid clamping down of dirty energy, squeaky clean companies like SolarCity and its spiritual cousin, Chairman Elon Musk’s main project Tesla Motors (TSLA) have a clear, bright future ahead of them.

It’s Gobbling Up Competition SolarCity recently acquired Zep Solar, sending their stock upwards. As the nascent green energy industry solidifies, a few major winners are expected to come out on top. Increasingly, it appears SolarCity might be one of them.

The Bears Case

Bubble Bubble, SolarCity’s in Trouble The company’s shares have risen almost 300 percent in value this year. Its earnings don’t come close to supporting SolarCity’s valuation. Of course, the bulls would argue that expected installations will make up for this. But expectations are just that, and until those mythical contracts materialize, the sun could set on SolarCity very soon indeed.

The Musk Factor The connection between SolarCity and Wall Street golden boy Musk has certainly benefited the company. As Rauond James analyst Pavel Molchanov said in May the price of SolarCity was “not rational” and that “(SolarCity) is a story stock, and with story stocks, sometimes valuation doesn't matter." And he said that when it was in the mid 30s. Now SolarCity is trading north of $54, begging the question of how much further the stock can propel on one man’s name alone.  

Analysts Don’t Like It Of the last four analysts to weigh in on SolarCity, one downgraded it (Needham, from Buy to Hold) and two – Maxim Group and Robert W. Baird – both gave it a “hold” rating with a price target roughly two-thirds of its current valuation. Only the most recent analyst, JPMorgan, who intiated coverage on  Oct 17, gave the stock a buy. In fact, every other analyst to weigh in on SolarCity hasn’t given it over a “hold.”

The stock currently has a consensus price target of $38 a share. On Oct 17 the company was at $54.09 a share. In short, analysts think SolarCity is due to set any time now.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TSLA Tesla Motors Inc. 186.80 5.33 2.94 4,072,224
SCTY SolarCity Corporation n/a n/a n/a 0
EMSHF Ems Chemie Holding Ag Ord 540.00 0.00 0.00 0

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