SolarCity (SCTY) reports their Q4 results tonight after the close, and the options market is implying about a 12.5% one day move tomorrow, which is a tad shy of the 13.5% average as a public company. To refresh, SCTY is the solar energy services company in which Elon Musk (CEO & Founder of Tesla Motors) is the Chairman and largest shareholder at 25%.
While Musk has gotten very wealthy from his stake in TSLA (he owns 23% of TSLA shares that have a market cap of $25.6 billion), SCTY’s 850% run from its December 2012 IPO, with the stock now sporting a $6.3 billion market cap has been the sort of icing on the cake for his fortune.
Now I was brought up well enough to know that it is uncouth to talk about another’s fortune, but it appears Musk’s deployment of his paper billions is good for the human race as he reinvests in industries that he believes will be integral in the planet’s future survival. His other venture, SpaceX, in which some private stock sales over the last year have valued the company near $5 billion, is also likely to be another widely successful Musk IPO in the near future. The guy risks his paper billions in what most would agree are amazingly risky ventures – high end electric cars, selling solar panels to individuals and commercial flights to space, the outer sort, not that inner sort that Richard Branson tools around in. Musk founded two companies to save the world and one to escape on if it’s too late.
What’s interesting about SCTY’s and TSLA’s stocks performance since SCTY’s IPO is that both stocks have traded quite closely over that period:
While this may not be uncanny, it is important to note some striking similarities between the setups. Musk owns about 25% of both stocks, both stocks have high concentration of top shareholders (the top 5 holders of TSLA own about 45% of the shares outstanding, while the top 5 shareholders of SCTY own about 55%). Short interest in both is extremely high with 37% for TSLA and 28% for SCTY. Why is this important? Well last year when TSLA raised $1 billion through a convert offering, Musk himself bought $100 million more on the deal when the stock was $92. While most founders may not sell early, most are not levering up after the stock had just doubled in a matter of months, if not weeks. Musk is in it to win it. And I suspect most of the top shareholders will key off of his confidence in the holdings.
So, with high concentration of top holders and high short interest, the potential for short squeezes is likely to continue to be great until there is some specific piece of news that changes each story. In the mean time, valuation does not seem to matter. The only thing that does matter is Musk’s continued involvement and incremental business improvement. At some point in the very near future, things like earnings and sales growth will matter, but for the moment, investors do not seem to care. I would add that the average move that I mentioned above post its 4 qtrs of results as a publicly traded company have all been to the downside.
We have had SCTY on our radar for almost a year now, and CC wrote a detailed Name That Trade post in July. It’s one of those story stocks where it has paid to buy every dip. At some point, that will change, but for now, the uptrend is intact. Of course, with implied volatility around 80, options traders should be careful to choose the appropriate structure. Given the elevated premium levels, you could get direction right and still lose money.