Tesla Stock Under Scrutiny
Tesla Motors Inc (NASDAQ:TSLA) announced its plan to buy SolarCity Corp (NASDAQ:SCTY) on Monday afternoon and the market was not impressed. Following that announcement, Tesla stock dropped a sizable 10.45% in the next trading session.
Still, Tesla founder and Chief Executive Officer Elon Musk is quite upbeat about this potential acquisition. Sure, Tesla is paying a premium to buy the rooftop solar company, but according to Musk, the premium would be nothing if you take a look at what the companies could do together.
“I think when people, as we’re down the road, not even far down the road, next year, but particularly as you go further into the future, there numbers are going to seem like a very small, very small number,” he said. “When I think of a combined automotive and power-storage and power-generation company and the potential for Tesla to be a $1.0 trillion company in market cap.” (Source: “Elon Musk: SolarCity Will Help Tesla Become a ‘$1 Trillion Company’,” Business Insider, June 22, 2016.)
Yep, Elon Musk believes that the combined company could reach $1.0 trillion in market cap.
Right now, Tesla stock has a market cap of $28.7 billion, while SolarCity’s market cap is at $2.1 billion. It would take a more than 30-fold increase for the combined company to reach that $1.0-trillion mark. The largest company in the world by market cap today is Apple Inc. (NASDAQ:AAPL), which, after its recent tumble, now has a market cap of $523.4 billion.
Through the company’s official blog, Tesla described how a combination of the two companies could benefit their shareholders. The merger would create “the world’s only vertically integrated energy company offering end-to-end clean energy products to our consumers,” he stated. It would also expand both companies’ total addressable market. (Source: “Tesla Makes Offer to Acquire SolarCity,” Tesla Official Blog, June 21, 2016.)
It’s not uncommon that the acquirer’s stock price slips after an announcement of a potential acquisition, while the acquiree’s stock price soars. In this case, the companies’ stocks follow the pattern, but the drop in Tesla is particularly steep. As a matter of fact, several widely followed analysts have expressed concerns.
For instance, in a note to investors, Barclays auto analyst Brian Johnson wrote that the proposed merger had “little in the way of synergies (and) much in the way of cash burn.” He added, “it is even more clear that Tesla will need additional cash raises.” Johnson concluded that the combined companies will have “uncertain growth/cash prospects.” (Source: “Musk Sees $1-Trillion Tesla as Shares Drop over SolarCity Deal,” The Globe and Mail, June 22, 2016.)
Rod Lache, an analyst at Deutsche Bank, said that the deal “is not a no brainer.” He argued, “Tesla vehicle owners primarily buy the vehicle because it’s one of the best, most advanced vehicles available. They are generally not looking for an end-to-end energy solution.” (Source: “‘A bailout for SolarCity’: Here’s what Wall Street is saying about Tesla’s offer to buy the company,” Business Insider, June 22, 2016.)
And then you have the famous short seller Jim Chanos, who told CNBC that the “brazen Tesla bailout of SolarCity” is a “shameful example of corporate governance at its worst.” (Source: “Chanos: ‘Brazen’ SolarCity deal is ‘corporate governance at its worst’,” CNBC, June 22, 2016.)
“SolarCity, whose bonds were yielding 20% yesterday, is a company headed toward financial distress,” said Chanos, whose firm is betting against both companies. “It is burning hundreds of millions in cash every quarter, a burden that now Tesla shareholders will have to bear, at a total cost of over $8.0 billion.” (Source: Ibid.)
The Bottom Line on TSLA Stock
At the end of the day, keep in mind that Elon Musk has successfully done quite a few things that many once thought were impossible. When critics said his company would never sell more than 2,000 cars a year, Tesla delivered over 50,000 vehicles in 2015. His space exploration company, SpaceX, even managed to land rockets.
Therefore, don’t rush to conclusions. Let’s wait and see if Elon Musk can silence the skeptics one more time.