Where Is SolarCity Stock Headed Post Tesla Offer?

Wall Street has been taken unawares by Tesla Motor's (NASDAQ:TSLA) shocking offer to buy SolarCity (NASDAQ:SCTY) on Tuesday. Surprisingly, the $2.8 billion all-stock bid has grabbed as much attention as such heavyweight issues like the presidential race, gun control controversy, ISIS terror and Brexit hullabaloo.

These two companies are exorbitant cash burners as they are striving to expand their portfolio. SolarCity is a San Mateo, CA, provider of solar power systems for homes, businesses and governments, while Tesla is a Palo Alto, CA, maker of electric cars and residential energy storage systems.

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Tesla announced its stock-swap buyout bid after the market close on Tuesday. The bid represents a 21% to 30% premium over SolarCity’s closing price on Jun 20. The news pushed SolarCity shares up about 14.72% to $24.31 in after-hours trading Tuesday, while shares of Tesla plunged 12.23% to $192.75. Obviously, shareholders of the electric car company didn’t feel elated about the proposed purchase.

On Wednesday, SolarCity shares climbed as much as 12.3% in the course of the session to settle up only 3.3%. The bullish run however was cut short in yesterday’s session with prices collapsing 13.6% from the prior day’s high to a low of $20.57 at one point. However, the stock recovered somewhat to close up 0.46% at session’s end.

As of now, shares of SolarCity haven’t shown as much of appreciation as was expected following the bid. What are investors worried about? Do they feel that the deal is not good for them?

SolarCity’s Unflattering Scorecard

Undoubtedly, the deal would make Tesla a vertically integrated clean energy powerhouse that would have a dominant share in the residential solar market and a major share in the battery storage and electric vehicle markets as well. Despite these potential advantages, analysts are skeptical of the deal on many counts.

We cannot ignore the fact that this leading U.S. residential solar installer has been struggling with its stock down nearly 57% year to date after incurring consecutive quarters of losses. The company’s rising expenses and repeated losses have stirred investor concern over its business model.

SolarCity, run by two of Elon Musk's cousins, has consistently lost money providing loans to folks to buy solar panels. Again, risks associated with the company's high debt management, poor profit margins, weak operating cash flow, generally disappointing stock performance and feeble bottom-line growth make it more and more unattractive.

M.J. Shiao, GTM Research's director of solar research, is of the opinion that "Solar is growing, but there's some regulatory uncertainty that plays a role here.” He believes “SolarCity in particular has been hit hard simply because they've missed their own targets and forecasts."

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Investors’ uncertainty may also have grown on the concern whether SolarCity’s cost of capital structure would support profitable economics down the road.