Monday, September 15, 2014

* SolarCity (SCTY) - Risk Collapses in Option Market as Risk Rises in Fundamentals

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SCTY is trading $67.81, down 8.4% with IV30™ up 9.6%. The Symbol Summary is included below.

Provided by Livevol

This is a stock and volatility note surrounded by some fundamental measures which hint at "surprisingly" low risk as reflected by the option market.  The data I'll present seems to indicate SCTY is nowhere near equilibrium, yet the option market is pricing the forward risk in the stock as though it is relatively stable compared with the past. Suffice it so say, the stock price has seen some remarkable moves and we now have a company worth over $6B that has never turned a profit.

The all-time stock chart is included below.
Provided by Yahoo! Finance

The stock, at its peak, rose 630% from IPO to 2-27-2014.  The stock then fell 45% in less than three months and has turned positive again up ~40% in less than four months.  Suffice it so say, the stock price has seen some remarkable moves and we now have a company worth over $6B that has never turned a profit.

I think that points to risk... but here are some underlying fundamental measures that may .point to even more risk...

Revenue (TTM)
For the most recent trailing twelve months, SCTY has generated over $200M in revenue.  That's a rise from ~$60M in mid-2011.

Gross Profit, 1-Year Growth %
In the last four quarters, SCTY has seen very strong gross profit margin growth, with the most recent reading showing over 150% growth.

Total Assets
With revenue growth and gross margin % growth, we're gonna see asset growth. Total assets for SCTY have grown from ~$1B to now just over $3B.  Remember this chart, it will come back soon with the stock price.

Operating Margins
here's where it start to look really ugly for SCTY. One of my favorite measures of all is comparing operating revenue to operating expenses.  Obviously a firm must have more than $1 in Op.Rev for every dollar in Op. Ex to be profitable and that minimal threshold is not even close to being met by SCTY, and it's actually shrinking.  For growth companies this isn't unusual, nor it necessarily some sort of end-all-be-all death nail, but at some point, at some time, this number mist be above 1.0.

Net Income (TTM)
Also called earnings, we can see three phenomena here:
1. The firm is showing losses essentially all of the time.
2. The losses are shrinking on a trialing twelve month basis.
3. On a quarterly basis, losses are actually worsening.  The last quarters, from most recent to least recent, are:

Stock Price vs. Total Assets
Interestingly, the stock price and total assets moved quite well together as the stock was booming, but the correlation has stopped as the stock dropped and assets continue to grow.  it's an interesting chart to examine as the equity market maybe moving away from growth measures to value the equity to more traditional fundamental measures (like earnings).

So what?... Well, all of that doesn't really draw a conclusion, which means it draws a conclusion of dis-equilibrium and risk... Or so you might think...

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  The risk has been collapsing in SCTY, to the point where just a week ago (ish) it was at an all-time low.  I gotta say, with everything we have seen in the fundamentals and the stock chart, I just don't get a sense of equilibrium and low risk for this firm right now.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$59.00, $76.00] by the end of trading on October 17th.

Using the January 2015 options, we see a price range of [$50.50, $84.50] by the end of trading on January 16th, 2015.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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1 comment:

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