Two years ago, I warned investors to avoid “kissing cousins” Tesla Motors and SolarCity. My reasoning was simple: Though at the time it was an industry leader in the rooftop solar panel sector, SolarCity had demonstrated a perverse reverse economics of scale in its business model.
My reasoning was simple: Though at the time it was an industry leader in the rooftop solar panel sector, SolarCity had demonstrated a perverse reverse economics of scale in its business model. The higher revenues rose, the weaker its operating margins became, and the more cash it bled.
Currently, only about 40 percent of rooftop systems deployed are still owned under a leasing model requiring a middleman like SolarCity. Instead, most adopters are buying their own systems and plugging into the utility grid on their own. The recent revelations related to the former SolarCity were accompanied by the unexpected resignation of Tesla co-founder J.B. Straubel, the company’s long-time chief technology officer. Straubel has pledged to stay on as an advisor to the company. But his estimated $30 million in profits selling Tesla shares the last nine months sound yet another note of caution for investors, as the stock year-to-date has now lost nearly one-third of its value.
For the most part, numbers showing profitability of rooftop solar and related “power walls” after expenses are mixed in with results from the automotive side. We know “cost of revenue” for this business was 88.5 percent in the second quarter 2019 and 88.2 percent in the year earlier period. But we have no idea what percentage of what Tesla calls “Operating Expenses” are actually attributable to “energy,” and what comes from the automobile business.
We’ve also seen a growing number of investor bets against Tesla’s bonds. The SolarCity 5.45 percent notes of April 2030, for example, now trade for less than 66 cents on the dollar for an elevated yield to maturity of nearly 11 percent. That’s versus a coupon interest rate of just 5.45 percent, which the company was able to get when it issued the securities back in April 2015.
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