One of Wall Street’s most famous short-sellers has set his sights on one of Elon Musk’s companies. Jim Chanos of Kynikos Associates is questioning SolarCity’s business model and shorting the company’s shares. But an energy analyst says Chanos is not being truthful.
Chanos, who first came to prominence shorting Enron in 2000, has likened SolarCity to a subprime financing company, saying that leases customers take on for solar panels amount to second mortgages on their homes.
SolarCity CEO Lyndon Rive refuted that charge and said that customers’ average FICO score is about 740, with the lowest at 650, slightly above subprime levels.
Meanwhile Musk, who is SolarCity's chairman and Rive's cousin, bought more than 123,500 shares at around $40.48 each on Friday as Chanos went public about shorting the stock.
An analyst following the company is also challenging Chanos’ accusations.
“We are all entitled to our opinions but not to our facts,” said energy analyst Pavel Molchanov of Raymond James. “Some of the claims he made about this company just are not true.”
Molchanov disputes Chanos’ contention that SolarCity customers will find themselves paying more for their electricity than if they used a utility.
“That’s just not right,” he said. “Unlike utility prices which have gone up in the United States on average every year since 2003, the economics of solar leasing enable pricing that is actually flat or escalates at a very predictable rate over a 20-year period, something that utilities simply do not have.”
Molchanov also isn’t discouraged by SolarCity’s cash burn as it spends on development. In 2014, the company had a negative operating cash flow of $218 million and capital expenditure of close to $1.2 billion, according to data compiled by S&P Capital IQ. He expects SolarCity to spend close to $2 billion this year.
“This is not equity capital that SolarCity is raising,” Molchanov said. “It is project finance-level capital primarily in the form of debt that is coming from various large banks and also coming from securitization in the capital markets. So this is not equity dilution that SolarCity is confronting. It’s purely project-level financing and the aim of this is to grow, not fund the company’s ongoing operations.”
According to the company’s latest filings, it has $2.07 billion in debt. As of August 25, with shares priced at $43.63, SolarCity’s total enterprise value is $5.8 billion.
Raymond James, which makes a market in SolarCity shares, rates the company’s stock as an “outperform” and has a $75 price target on it. A key factor in Molchanov’s estimate is its lease contracts, which he values at over $30 per share.
“Based on the growth curve – and it’s a very robust growth curve – by the end of next year, it should be over $50 a share” he said. “And of course there should be growth here for many years to come, through the end of the decade and probably beyond.”
Solar “penetration in the United States is less than 1%,” he added. “In countries like Germany and Italy, it’s close to 8%. So that shows where the U.S. can ultimately go…. SolarCity should do very well to play that growth curve.”
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