Berko: Does Musk's SolarCity stock shine?
Tuesday, January 14, 2014 1:00 AM
Dear Mr. Berko:
I want to invest in a solar energy/utility stock, and my broker recommended that I buy 200 shares of a company called SolarCity, which he says is run by the same person (Elon Musk) who runs Tesla Motors. Do you think this would be a good investment, considering the fact that Musk is involved? I would like to invest in this industry because I think the future is fantastic. Are there any other solar issues that you can recommend?
I understand your enthusiasm for SolarCity Corp. (SCTY-$65.68), founded in 2006 by the Rive brothers in collaboration with Musk. But you’re ascribing extraordinary powers to this Musk chap, who, with Peter Thiel, founded PayPal in 1998. In 2002, PayPal was sold to eBay for $1.5 billion after Musk was contentiously removed as CEO by its board of directors. Musk is kind of a geeky, spacey guy who, in late 2001, designed the project “Mars Oasis.” He intended to land miniature greenhouses on Mars, containing food crops growing on Martian regolith. But Musk put his Mars Oasis on hold when he realized that current rocket technology would not allow humans to become “true spacefaring” people. Hello! He sought to address this problem by founding SpaceX, which so far is flying in the red and running up debts. His Tesla Motors, founded in 2010 and financed with four partners, hasn’t made a dime either, but the company has a ridiculous market cap of $18 billion. In late 2011, this wacky genius spent millions researching a new form of transportation between Los Angeles and San Francisco, and in August 2013, he unveiled his “Hyperloop,” a subsonic air travel machine relying completely on solar energy that would permit commuters to travel the 350 miles between the two cities in 30 minutes. As long as Musk has billions in the bank, he’ll be a genius, but take away his money and people will call him a fool. Meanwhile, Madison Avenue’s marketing has done a splendid job of promoting his name and reputation. But very few things he touches turn to gold; Musk is a geek without management skills, and investors should realize this.
Meanwhile, SolarCity investors are living proof of the validity of the “greater fool” theory. SCTY designs, installs, leases and sells solar systems to residential, commercial and government entities in the U.S. It also sells electricity generated by solar energy systems and markets, as well as installs, electric vehicle charging equipment to residential and commercial customers through various retail partnerships. Since 2009, SCTY has produced $260 million in cumulative revenues while losing a total of $220 million. It plans to lose about $130 million this year on higher revenue as brain-dead investors, frantic to be part of the Musk aura, push the shares to new highs. This low-revenue company, with a negative free cash flow of $525 million and zero earnings in sight, has an astounding market cap of more than $5.4 billion -- proof there are a bunch of fools out there.
There must be at least 60 other public companies and hundreds of nonpublic companies in the same business. Advanced Energy Industries Inc. (AEIS-$24.75), with $1.4 billion in revenues, First Solar Inc. (FSLR-$51.24), with $3.6 billion in revenues, SunEdison Inc. (SUNE-$14.39), with $2.1 billion in revenues, SunPower Corp. (SPWR-$31.96), with $2.6 billion in revenues, and SMA Solar Technology AG (SMTGF-$30.45), with $1.3 billion in revenues, are a few much larger companies with nearly identical potential. However, you might consider investing in Guggenheim Solar (TAN-$41.08), an exchange-traded fund that owns a $400 million solar portfolio with about 40 different issues. It has a price-earnings ratio of 16-to-1 and a 1.1 percent yield. And you might also consider Market Vectors Solar Energy (KWT-$82.07), also an ETF, with a P/E of 21 and a $30 million portfolio of about 35 issues, yielding 0.9 percent. All of these solar stocks are volatile issues, and every one of them trades at a price that is not valid today but that may be valid 10 years hence.
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