TeslaCity – The One Stop Shop For Sustainability

Why is Tesla Acquiring SolarCity Now?

First of all, vertical integration at this level is extremely rare, almost unheard of. It’s the equivalent of GM buying Exxon or Boeing buying GE. An Albino Rhino if you will. While a $2.8B merger/acquisition isn’t very high for two blue-chip companies, the impact it potentially has on two industries is enormous which makes the FTC and the Department of Justice very nervous. So we need to not blindly assume that this acquisition is approved, although it’s likely.

Product Synergy

Musk and the Rive’s see the new combined company not as a car company or solar company, but rather a one stop shop sustainable energy company. Tesla’s are electric cars need to be powered by electricity and SolarCity in an energy company that generates energy via solar panels. And both need substantial battery power. Elon Musk’s ultimate vision is for one electric truck to drop off a pre-ordered Tesla, not from traditional auto dealers to a house and also set up install solar panels on the roof. The final install is a multi-use lithium battery that charges your Tesla and facilitates the home’s solar energy needs. Whew…that’s a lot of vision huh? Doable? Yes. It’s going to happen one day. But it’s impossible to say if it will be 5 years or 25 years down the road.

Price

SolarCity’s stock price has gone down 62% in the past year. (SEE IMAGE). So Musk can buy it for less than a few years ago…which is a little weird because his two cousins are the other major shareholders of SolarCity so they are going to make a heck of a lot less. 

SolarCity Market Cap

Stability & Cash On Hand

Tesla and SolarCity are cash intensive companies that play in very unstable sandboxes thanks mostly to certain politicians ..cough-cough…Governor Sandoval. Tesla needs additional capital raises to continue its expansion of electric car and battery production. Same with SolarCity which needs capital to fend off competitors and a dozen other reasons. And Tesla now has several billion dollars coming from 400,000 pre-orders of the Model 3 which SolarCity could now get direct access to after the acquisition. This potential takeover is all about stabilizing the unstable as much as humanly possible. It has less to do with corporate synergy since they already maximize those being Musk owns 19% of Tesla and 22% of Tesla, sits on the board of both companies, is Chairman of SolarCity, and is first cousins with the two co-founders of SolarCity, Lyndon, and Peter Rive. They’re already adjacent companies and adjacent technologies, now they will just live under one roof and remove unnecessary bureaucracy and repetitive operations. Basically, it will just save both companies a lot of time, money, and energy to do everything under one roof.

Capacity Issues

Don’t promise what you can’t deliver…literally. In April, Tesla got a heavy dose of experiencing too much of a good thing when they received 400,000 pre-orders of their upcoming Model 3 in just two-weeks! What’s even crazier is that many Why so many pre-orders?

  1. The latest “super-cool” gas-less car from the coolest car brand is only $35,000, very much in the price range of the average American driver. Further verifying Tesla’s “cool” factor is that so many of those orders were made before its unveiling many.
  2. The deposit was only $1,000 and it’s fully refundable except for buyers from China who were required to give a $9570 deposit.

So it’s obvious Tesla required this tiny $1,000 deposit to gauge or confirm the world’s appetite for cheaper Tesla cars and then compare it to their current production capacities. Musk has reiterated time and time again that Tesla must produce electric vehicles in sufficient volume to force a change in the automobile industry. Tesla has a planned production rate of 500,000 cars per year by 2020 after their Reno Gigafactory is in full production swing. But many experts say it’s closer to 400,000. So it appears with a pre-order of 400,000 of Model 3’s in a matter of days plus around 50,000 Model S’s and X’s combined per year now and increasing quickly, Tesla is rapidly approaching the max capacity. So although it seems that team Tesla has found their sweet spot with their audience, Musk’s team said it would take up to 4 years to full-fill all 400,000 pre-orders, assuming not a single depositor backed out. Remember, that’s $14 billion in sales if 0% back-out. But let’s say only 25% full-fill their obligation, that $3.5 billion in sales and 100,000 units due over 4 years PLUS sales of their other models. Therefore, Tesla is now fully aware they have BIG production planning and logistical issues such as expanding production at both its California and Nevada factories more quickly than expected.

So how does the SolarCity acquisition factor into all this? Economies of scale and cash on hand. Common materials will become cheaper to acquire for both companies, reducing retail costs of their products which are desperately needed, especially with Solar PV. Although SolarCity is funded through debt just like Tesla, Tesla could use SolarCity’s available cash now to finance parts of Tesla’s business, or vice versa. Borrowing from Goldman Sachs or issuing bonds and stocks is not an overnight process. But borrowing from SolarCity is which an absolute necessity for both companies since their industries go up and down like a sea-saw at the drop of a hat. In general, having both companies under one roof will give Tesla much more flexibility and options when they need to re-configure or increase their capacity.

Tesla Model 3 Pre-Orders by Country

US: 255,760

China: 14,156

Canada: 36,764

Germany: 19,706

UK: 11,460

Netherlands: 10,685

Australia: 7,109

Sweden: 7,064

France: 7,009

Switzerland: 5,779

Norway: 4,834

Italy: 4,685

Spain: 3,111

Mexico: 1,430

Japan: 1,424

Portugal: 744

Ireland: 522

Nevada Politics

Last year, the Nevada Legislature and Governor Sandoval essentially gave solar energy the boot when Governor Sandoval decided to support NV Energy’s decision to not lift the cap of net metering. SolarCity and SunRun literally packed up over night and left.

A Bold Move and Desperation

Tesla and SolarCity have been struggling financially the past couple years. They’re also losing key executives, Production Vice President Greg Reichow and Manufacturing Vice President Josh Ensign. Even though Tesla’s revenue increased by 50% in Q1 2016, Tesla reported a first Q1 loss of $283 million, or $2.13 a share, as the lower-than-expected deliveries hurt revenues. On an adjusted basis, Tesla lost 57 cents a share.

Tesla Market Cap

Musk Himself

Elon is not a materialistic guy. He has a ton of pride and ambition. He fundamentally wants to change the world just like the late Steve Jobs. He just has a much more accepting personality than Mr. Apple. Musk consistently breaks one of the top rules of business which is to not use your own money to finance the projects you are involved in, especially startups. Time and time again he invests millions upon millions into SpaceX and Tesla to keep it afloat because his ideas and projects are so out of the norm that it’s tough to get financing. Plus his prospects for financing are close with all of his competitors. His biggest competitors are some of the richest people and most institutionalized entities on Earth.  He has an on-going battle with the Warren Buffet because Berkshire Hathaway owns NV Energy which kicked out SolarCity from Nevada. Penetrating the legalized monopolies of state and regional energy companies is one of the toughest things a businessman has tried to do because you are also battling local, state, and the federal governments. He’s also in a consistent market share and advertising share fight with GM and Ford for Tesla. Now he’s battling for government funding for SpaceX because the private investment money in the space industry is virtually nil. Lastly, from a general business standpoint, Elon will have more say on what happens with SolarCity on a daily basis as it’s new boss. Additionally, as the largest shareholder and boss of SpaceX, he now controls his full financial fate.  We’ll just have to wait and see if he can pull off all that he wants to accomplish.

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