When Debt is Worth $2.8 Billion

It shouldn’t. Plain and simple.

But in the eyes of the prolific and revolutionary owner of Tesla, Elon Musk, its worth about 11,000 Teslas weight in gold… or a company that could one day be valued at $1 trillion. To put this in perspective, that’s roughly double the valuation of Apple (the world’s most valuable company), thirty-three times the current value of Tesla and basically a feat that has never been accomplished by any company since the formation of the stock market.

Don’t get me wrong, I’m a huge fan of Mr. Musk and, like a majority of the world, believe he’s brilliant. But there comes a time when I have to set my fanboy hat aside and wonder what alternate reality he foresees that the rest of us don’t.

The announcement of Tesla’s intention to acquire SolarCity, on its surface, seems justifiable to the public. Electric car plus solar powered homes equals an abundance of synergies. But in this case, it equates to an abundance of potentially devastating outcomes that could jeopardize the vision of the entire electric car company.

For those that don’t know, here’s how SolarCity’s business really works.

Most people probably think that it's a company focused on the development of technologies related to solar panels and the powering of homes. It doesn't. The company doesn’t actually produce any solar technology. Its main business operations revolve around buying cheap solar panels from China and installing them on homes for a fee. The company is essentially the middle man in bringing solar panels to the public. I like to think of them as a financing or asset leasing company for solar panels.

The business model is more or less a standard one. An entity with lots of capital (SolarCity) buys an asset that most consumers can’t afford to pay off in one payment (solar panels). SolarCity then installs these on homes for a fee and the homeowner pays a perpetuity to the company until they decide to forgo the service.

Both sides benefit. The consumer is now able to obtain the product without having to pay $10,000+ at once and are able to reduce their payment on electricity. For example, a costumer may have once paid $150/month to an electric company and now pays $100/month to SolarCity. On the flip side, SolarCity benefits though classic lender techniques. The company may have paid the initial $10,000 down payment but is now receiving monthly payments from the consumer who installed the panels for the life of its use. In due time, SolarCity’s cash inflow from the customers will exceed their cash outflow of payment for the panels.

But Tesla shouldn't be so keen on this model. As mentioned above, SolarCity has to first spend money before it can make money and if the company is lucky, it might be able to turn a profit in 5-10 years. Right now, SolarCity is hemorrhaging cash - millions of dollars is spend on buying the solar equipment. Which means if Tesla acquires this company they will be responsible for the cash hemorrhage. This would take away from the execution of key activities – car production, other R&D research, and the ability to acquire other [sensible] companies. At the heart of it all, the real reason why this is a horrific move for Tesla is because it would not stay true to the company’s core values and mission.

Here are some of the gaps:

·        SolarCity offers no aweing renewable technology

·        It won’t make Tesla’s cars go further, faster or stronger

·        It won’t drive down costs to consumers for solar panel installations

·        Solar power still has obstacles in order to be scalable (factors include right location, housing complex, trees casting shade, etc.)  

·        It won’t power the Tesla home battery to where everyone would buy one

·        SolarCity isn’t a revolutionary company, in essence, it’s transactional – creating a flow between cash and solar equipment

In the end, Elon and the Tesla gang are just spending $2.8 billion to acquire debt. With this type of spending spree, they might as well have started their own solar division without the baggage, invest in their current R&D department or put the capital to good use for a new production plant. You know, one to fill the 400,000+ preorders of the Model 3. Then again, maybe this is another genius move that only Elon himself could’ve predicted.

SolarCity investors… sell your shares when the price is above $25. There’s so much risk with the recent fluctuation of the stock that this is a fair price, the highest uptrend for the stock will be around $28.