The longer SolarCity (NASDAQ: SCTY) has been on the stock market, and the higher the stock has gone, the more investors have been betting against it. As you can see below, short interest in SolarCity has reached 18.8 million shares, 19.5% of the shares outstanding. So, what do investors have against SolarCity stock?
Growth but no profits
SolarCity has been a growth machine, doubling installations every year for the last five years to a projected 920 MW-1 GW this year. But it hasn't been able to make a profit. In 2014, net loss attributed to shareholders was $56.0 million, and there's no end in sight to losses.
Bulls will argue that retained value of $2.4 billion will eventually turn into profits, but that number includes some rosy projections, and if any of them fail to come true, the stock could plummet.
2017 is on the horizon
Another thing short sellers are looking at is the pending expiration of the investment tax credit, which is due to fall from 30% to 10% for commercial projects in 2017, and 0% for residential installations at the same time.
If that happens, as the law is written today, installations could plummet for SolarCity and other installers around the country. Take a look below at GTM Research's projections of U.S. solar installations and notice that 2017's installations are projected to be about what the industry installed in 2013.
If that projection comes true, and installations drop in 2017, it could be terrible for SolarCity stock because it doesn't have any profits to fall back on.
SolarCity bulls who are short the stock
There are a lot of SolarCity shares sold short, but not everyone is betting against the company -- at least not on merit alone.
In 2013, SolarCity sold $230 million of 2.75% convertible senior notes due in 2018 that are convertible at $61.67 per share. Of course, the shares have shot above that price since then, and it's possible that holders of that debt shorted the stock to cover their position.
If the stock continues to climb, their net position would be nothing, and they would just collect the coupon every six months. If the stock falls -- as it has -- they would make money on the short position and still get their principal back when the notes mature.
This group of short sellers represents only about 3.7 million shares, so there are still a lot of people down on the stock. But some of the short interest is due to convertible debt, which is important for investors to understand.
A high risk short
I think there are a number of reasons to think SolarCity is overvalued, highlighted by the factors above. But this is still a high-growth company and the market can be irrationally exuberant about growth companies for a long time.
At the end of the day, I think the short interest and the bear arguments for SolarCity are a reason to be cautious on the stock. There are just too many unknowns that may work against the company for me to be a buyer of the stock today.