Long/Short Investments
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Long/Short Investments in L/S Equity: Valuation and Ideas,

​SolarCity’s (SCTY) New Financing Scheme

SolarCity (SCTY) raised nearly $350 million in June and July and added over $100 million to its now $760 million debt facility. The funds were used to fund new solar panels and the associated installation costs.

I’ve written my opinion on SCTY before. I think it’s a terrible company whose existence wholly relies on the continuation of government subsidies.

In short form, here is my general rationale for a short thesis:

  1. Terrible margins (EBITDA margins -100%) or, in other words, opex twice as high as revenue
  2. Extreme over-leveraging with a high cash burn rate
  3. High level of capital intensity involved in solar vending and installation
  4. Little competitive insularity, as solar vending and installation is a common business and difficult to differentiate oneself in or establish legitimate competitive advantages
  5. Investment tax credits and lower energy bills incentivize solar adoption and SCTY serves as the specialty lender. When these incentives run dry, the value-add of the company will decrease. 
  6. Not a guarantee that solar panels will have value 15-20+ years from now
  7. § Solar is also costlier than the energy produced by natural gas plants
    § Solar is also an intermittent energy source, so therefore must be supported by mid-merit plants (also known as load following plants), which adjust for fluctuations in energy demand as electricity ebbs and flows through the day and therefore buffer against these intra-day shifts. These plants also run on fossil fuels, removing some of the "clean energy" aspect.
  8. SCTY also serves as a financing company and this faces its own issues  
  9. § If the company lowers its financing rates (i.e., saves its customers more money), it would directly cut into the company’s profitability
    § If company raises rates, it increases its profits but directly strains ROI for customers, reducing the value-add of the company