Tesla Motors (NASDAQ: TSLA)
recently announced to acquire Solar City (NASDAQ: SCTY), a provider of
renewable solar energy for residential and commercial customers. On the surface,
the rational is the vertical integration related to the combination of two
businesses, which could prove beneficial for Solar City in the competitive solar
market. But, there are many caveats that come with the deal, if it goes
through.
Firstly, both Tesla and Solar
City are cash hungry businesses. Tesla is ramping up Model 3 production. Solar
City hasn’t been able to generate positive cash flow for the past four
quarters. Same holds true for Tesla. If Tesla provides batteries for SolarCity’s
products at low price, it’s going to hurt its margin and cash flow.
Tesla is financing the deal by
issuing more shares. The company has already raised cash for its Model 3 plans.
Now, further dilution to EPS will put a pressure on the stock price. Looking at SolarCity, a rate hike by FED in
future will further affect the margin of the company on financing residential
and commercial projects. Not to mention, the competition from other Solar power
providers at home at abroad.
Overall, the deal doesn’t seem to
be a good one, at least from a short-term perspective. Cash burn will increase;
EPS for Tesla will go down affecting the stock price negatively. Tesla is already
trading at a value not justified by conventional valuation techniques. Therefore,
risk-averse investors should steer away from Tesla while risk seeking investors
can gain from shorting Tesla Motors now.
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