Musk shrugs off stock plunge, defends Tesla-SolarCity deal

Source: Christa Marshall, E&E reporter • Posted: Thursday, June 23, 2016

Tesla Motors’ stock is taking a hit today as financial analysts question the wisdom of the automotive company joining forces with SolarCity.

Tesla CEO Elon Musk announced plans yesterday to acquire the solar installer as part of a broad effort to integrate the company’s existing residential battery business with solar power (ClimateWire, June 22).

The stock had fallen more than 7 percent by publishing time. Meanwhile, multiple investors slammed the deal, with one saying it stretches the “bounds of industrial logic.”

Some analysts compared it to SunEdison’s woes after that company broadened its scope and ended up terminating its merger plans with Vivint Solar. SunEdison filed for bankruptcy protection earlier this year. While Tesla’s situation is very different, they said, that example highlights the challenge of Tesla expanding when it already has a lot on its plate like the rollout of the mainstream Model 3 electric vehicle.

“While we remain bulls on the solar industry, we do not view this acquisition as the best and highest use of Tesla’s capital and human resources given the potential return on capital possible in the electricity industry,” Oppenheimer & Co. said in a research note. It noted that return on capital can be much less with solar than in the automotive space.

“We expect a robust shareholder fight over this acquisition,” the note said. “We believe investors are likely to view this transaction as a bailout for SolarCity and a distraction to Tesla’s own production hurdles.” SolarCity’s stock, like those of other solar companies, has fallen sharply this year (Greenwire, May 12).

Similarly, Deutsche Bank said Tesla investors likely would view the development as a negative, as Tesla could “benefit more” from focusing on its existing growth plans. “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,” it said.

Wall Street Journal opinion column was even harsher, saying the deal “defies common sense” and “stretches the bounds of industrial logic.”

“Both businesses, for different reasons, are cash hungry. In the past four quarters alone, Tesla burned up nearly 50 cents of cash for every dollar of sales it made. But it was practically the U.S. Mint compared with SolarCity,” the column said.

Tesla could achieve the same goal of integration with solar by just partnering with SolarCity or any other solar provider, according to Sam Abuelsamid, an analyst at Navigant Research. “You don’t need to own it to sell it,” Abuelsamid said.

But in a conference call last night with reporters, Musk portrayed the deal as a natural step to combine businesses that already have a strong partnership. Tesla’s Powerwall batteries already are tied with SolarCity panels for a distributed storage option. And expected sales of Tesla batteries to SolarCity this year could outpace the entire U.S. “behind-the-meter” energy storage market last year, according to GTM Research.

Musk said he envisions Tesla stores as places where customers could buy an electric car, solar panels and a storage option. A merger also would reduce overlap with installations and equipment, he said.

“Instead of having three trips to a house to put in a car charger and solar panels and a battery pack, you can actually just integrate that into a single visit,” he said.

Fluctuating stock prices should be taken with “a grain of salt,” he said. Despite its decline this morning, Tesla’s stock is still above its low point in February.

“The world does not lack for automotive companies. It lacks for sustainable energy companies,” he said. There will be “a lot of partnerships” with utilities for solar-storage combinations with SolarCity under Tesla’s banner, he said after being asked about Vermont’s Green Mountain Power.

Last month, Green Mountain Power began customer installations of the Tesla Powerwall home battery for its customers — one of the initial locations the batteries are being rolled out in the United States after Tesla unveiled the Powerwall last year.

Musk did not elaborate when asked how management might shift with an acquisition of SolarCity. If a deal goes through, SolarCity will be part of Tesla, and he expects there to be “few walls” internally, he said.

Musk remains committed largely to solar as the renewable of choice tied to Tesla batteries. When asked whether Tesla might move into other renewables like wind, he said that isn’t likely, as “wind companies are doing fine.”

“I just think you can fully solve the problem with the giant fusion reactor in the sky known as the sun,” Musk said.