SolarCity's Deal Vote Opens Short Opportunity, Says Solar Analyst

Johnson's downgrade comes a day before the proposed Tesla Motors Inc TSLA–SolarCity merger will be voted on by shareholders.

The analyst stated that he now expects a 70 percent chance of the merger being approved, up from a prior estimate of 50 percent. However, the deal calls for a 0.11x exchange of Tesla's stock for each share of SolarCity, which would value SolarCity's stock at just $20.21 per share, or a 2.0 percent upside.

Why Only A 70% Chance Of Approval?

Johnson further noted that there is still a 30 percent chance many investors choose to walk away from the deal. The analyst highlighted a 10-Q regulatory filing SolarCity released last week that includes two key takeaways.

First, SolarCity sold around 25 percent of its panels to the commercial & industrial (C&I) segment during the quarter at roughly $3.00/W. Based on the analyst's checks, C&I prices in the United States are 35 percent to 50 percent below what the company reported.

As such, spreading the SG&A across proportionally to the average selling price, SolarCity's creation cost would be notably higher than its reported $2.89/W level which implies a huge miss on megawatts deployed in the third quarter.

Second, SolarCity changed the useful lives of its systems from 30 years to 35 years in the quarter which artificially reduces depreciation expenses.

"We believe these actions are HIGHLY questionable, and assume Tesla investors either: (a) lack a very basic understanding of the solar market, or (b) lack a very basic understanding of accounting," Johnson wrote.