Over the past month, several SolarCity (NASDAQ: SCTY ) insiders have sold their shares. CEO Lyndon Rive, for example, sold 160,000 shares on April 29. Others, like chief counsel Seth Wiessman, have exercised options and sold the shares given to them. Given that SolarCity shares have retraced significantly, some investors are understandably concerned about the selling. They fear that the recent spate of insider selling may be indication of decaying fundamentals.
There are some qualifications to those concerns.
Three qualifications to the insider selling
First, the insider selling is not a large amount relative to the total that insiders own. CEO Lyndon Rive, for example, still owns 779,257 directly and 1,899,812 shares indirectly. For Rive, the 160,000 shares sold represents just 5.9% of his total holdings. Given that SolarCity stock has rallied significantly since the IPO, it is not uncommon for management to take a small portion off the table
Second, Lyndon Rive's insider sell was an automatic sell planned months ago, so the selling is not an indication that he has lost confidence in the stock.
Last and most importantly, Elon Musk, the chairman of the company, has not sold any shares -- he still owns 21 million shares of the company. Since the IPO, Elon Musk has actually been a net buyer of shares. He bought 214,869 shares of SolarCity indirectly at an average price of $46.54 last October and owns approximately 23% of the company.
The bottom line
The insider selling by the CEO may look bad, but it is not unusual.
As for SolarCity's stock, it may have seen some selling lately, but the weakness is not due to decaying fundamentals. SolarCity's recent weakness is due to other reasons -- most notably momentum and a general solar sector correction.
Long term, SolarCity remains a risky bet, but likely a good one. The correlation between Tesla (NASDAQ: TSLA ) stock and SolarCity stock may have broken down, but fundamentally it shouldn't. If the market is right and Tesla becomes a winner in the electric car industry, then it is very likely that SolarCity will be one of the winners in the solar industry. This is because the two will likely share R&D and marketing. Battery technology may one day be just as important in the solar sector as panel efficiency is now. With Tesla's economies of scale in battery technology, SolarCity may be able to offer products at cheaper price than other competitors. It can grab more market share and realize greater margins. All of this translates to a huge competitive advantage that very few solar companies can match.
So far SolarCity has executed very well on its plan to get one million customers by 2018, grabbing significant market share in the process. Management has shown its willingness to do whatever it takes to grab market share, and the company remains a master at marketing and financing. Some may fault SolarCity for making certain accounting assumptions that people think the company shouldn't have made, but sometimes to get ahead, one has to do what's necessary.
Even with the recent insider selling, insiders still own a substantial part of the company. They have every incentive to execute and deliver. So far, they remain on track to do so.
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