Musk purchases US$5 million of SolarCity shares following business model criticism

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Tesla chief Elon Musk purchased US$5 million worth of SolarCity shares a few days after the head of a short-selling hedge fund ignited a war of words with SolarCity’s own CEO, Lyndon Rive.

Financial news sites reported a rise in share price of 8.83% for the US PV installer immediately following the news of Musk’s purchase, which according to an SEC filing numbered 123,510 shares bought at US$40.4855. The price rise levelled off at just over 7% as markets closed.

On Friday, Jim Chanos of Kynikos Associates had spoken on CNBC show Halftime Report and criticised the US PV installer’s financial position and business model.  

According to Chanos, while it was “a great thing” that the costs of solar keep falling, he believed that SolarCity’s model of long-term agreements to lease PV systems meant that customers would be tied in to “above market” price electricity once the cost of solar fell beyond a certain point, making it difficult to attract new customers. Chanos said the company was “burning an awful lot of cash” and said the SolarCity business model “had been passed over in terms of the more institutionalised and distributed model of solar”. Short sellers such as Chanos make money by agreeing to purchase stock they expect to fall in price, and then brokering deals in advance to sell it on at the original price it was when they bought it, essentially betting that its value will fall.

Chanos even went as far as to call SolarCity a “subprime financing company, in effect” by comparison to the more “industrial and commercial plays” of companies like SunEdison, raising the spectre of the 2008 financial crash. CNBC subsequently reported that SolarCity shares had fallen more than 11%.

SolarCity CEO Lyndon Rive responded angrily, even calling into CNBC’s ‘Options Action’ show himself to defend his company. He pointed out that ultimately SolarCity offers PV to customers at rates lower than they would be paying for their electricity, guaranteeing savings. Rive said he thought Chanos did not “have his facts straight”.

“We sell them [customers] energy at a lower rate than they can buy from the utility today, so the likelihood they are going to default on us is extremely low,” Rive said.

Rive also added that credit scores required by SolarCity and its customers are higher than the FICO sub-prime threshold.

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