Friday, December 18, 2015

Chanos Says He's Still Shorting SolarCity ‘Not a Technology Company’ (SCTY)

We've posted on the Chanos SolarCity short a few times and pointed out some oddities in Mr. C's public pronouncements. More after the jump.

The stock was as low as $28.35 the day the Paris climate confab opened, Nov. 30, and traded as high as $58.87 yesterday. If Chanos maintained the short through that double-in-17-days he's either nuts or thinks the stock is going much lower.
Today, $54.62 Down 2.63 (4.60%).
 SCTY SolarCity Corporation daily Stock Chart
From Barron's Tech Trader Daily:

Solar City: Chanos Keeps Shorting; ‘Not a Technology Company’
As shares of Solar City (SCTY) and other solar energy names continued to rally today as a result of yesterday’s announcement of a budget plan by the U.S. Congress that extends tax breaks for renewables, Jim Chanos of Kynikos Associates was a guest this afternoon with host Kelly Evans on CNBC in the “Closing Bell” segment to discuss why he can’t short the stocks fast enough.
“I wish I could borrow more” to short of SCTY, said Chanos. “The stock is hard to borrow.”

Chanos’s main beef with the company is that it is “not a technology company,” it’s a financing company.
“I think that the ITC was clearly good news for the industry,” said Chanos, referring to the investment tax credit extension announced yesterday.

But for Solar City, unfortunately, it’s not a technology company. I know we had this debate on the air with the CEO. It’s a finance company. And they own the panels so the ITC, they keep and they farm it for their equity, but the deal to actually residential customers is not a great deal. it’s not a great deal for solar city customers – or shareholders, either. if you look at the company and you eliminate almost all their expenses, you assume they didn’t market, they didn’t knock door to door, they didn’t have an administrative thing, the return on capital is about 7% and even with the move in the stock so far this week the company’s bonds yield more than 7%. the company is burning $500 million a quarter. so all this itc extension will do is enable them to keep burning hundreds of millions of dollars per quarter.

Evans asked about other solar names, and Chanos said he believes in the expansion of solar generally, he just thinks it will happen so fast that there won’t be much value left in the residential part of the market:...MORE
SolarCity: Jim Chanos On Elon Who? (SCTY)
...That said, I think he is dissimulating on his reasons for this short. It's not the 'subprime' that he mentions in the clip below, he is smart enough to know the ins and outs of SolarCity's financial statements to know that's not the case.

Nor is it the 'falling cost of solar' argument he makes.
I think that is the hedge fund equivalent of the magicians misdirection move.

Rather it is pure and simple a numbers game:

1) the cost-of-funds/net interest margin problem that can come up when you're borrowing short and lending long, exacerbated by the potential for rising rates and potential credit downgrades of SCTY and/or the paper making up the ABS'.

2) Current negative cash flows: $138 mil on an operating basis and total free cash flow of negative $1.39 Billion. Per quarter.

3) A business model that doesn't even start to work without the assumption that grid electricity prices escalate at 4.8% per year for the next 20 years.
Even in California the increases since 2008 have 'only' been 3.5%/yr. and 2.17%/yr. since 1990....
SolarCity's CEO When Told Jim Chanos Is Shorting His Stock: "First I've ever heard of the guy" (SCTY)
UPDATED--SolarCity Drops 10% Because... (SCTY)