Tesla Can't Win This One

| About: Tesla Motors (TSLA)

Summary

This is more of a subjective take on a dilemma the SolarCity acquisition raises.

It can perhaps be said that Tesla cannot win when it comes to this deal.

Either Tesla loses because the deal is completed or Tesla loses because it not being completed requires losing faith on Elon Musk's unbelievable promises and infallibility.

Click to enlarge

Heavenly J.J.Abrams-worthy lens flare shines down on the technology prophet as he delivers his otherworldly message onto the faithful

Here's the thing, it's highly desirable for Tesla (NASDAQ:TSLA) shareholders that its SolarCity (NASDAQ:SCTY) acquisition falls through.

It's highly desirable because SCTY is basically a worthless asset that's going to increase TSLA's cash burn rate. And worse still, it might even lead to a near-$1 billion cash outflow not long after closure (on account of having to buy out SCTY's convertible noteholders and possibly pay off a credit line).

Of course, the SCTY acquisition failing is not just desirable for TSLA shareholders. It's also within their powers to kill it. They will vote on the deal, and if the majority votes against the deal, the deal dies.

Yet, at the same time, such outcome (the deal failing) is rather unlikely to happen if TSLA shareholders are to keep believing the company's promises. Why do I say this? That's the gist of this article.

Tesla Is Built On Faith

Tesla has made many unlikely promises. Things like bringing the Model 3 to fruition already during 2017 and to sell 100k of those cars right away. Or the promise of not needing more money, though it keeps asking for it. Or the promise that it will at some point become profitable and be worth the massive valuation it already trades for. Or the promise that the Gigafactory would somehow lead to cost savings not enjoyed by other battery makers. Or the promise that the Gigafactory was at the same time necessary to have enough batteries for the Model 3, and is now not critical since it won't be fully built even as Tesla promises a 400k/year production run rate for the Model 3 right at the tail end of 2017.

Many of these promises are unrealistic and internally inconsistent, especially when we consider that TSLA isn't profitable now without any direct competition. Tesla being very profitable in the future while facing competition is thus a very unlikely outcome. With so many unrealistic promises, TSLA requires faith. It requires faith because it requires believing without proof.

Faith, in this case, is deposited on Elon Musk. The semi-God Musk, the genius Musk. The one that can see what others can't. Quite often, in arguments, the bullish argument turns to "Musk knows better" or "Elon Musk has landed a rocket and made the best EV the world has ever seen. What have you done?"

One surmises that many if not most of those holding TSLA stock hold it not because of profitability or valuation, but simply on the promise that Elon Musk will deliver. That Elon Musk is a genius who can do no wrong.

Therein Lies The Problem

So what do we have here? We have a dilemma.

On one hand, we have very obvious reasons to believe the merger is a negative which will greatly endanger TSLA. And on the other, we have Elon Musk - the genius, the one reason to hold TSLA - idealizing and pushing for the deal.

To solve this dilemma and especially to reject the deal, thus requires one to drop the belief that Elon is always right and that whatever promises he makes, however unlikely, can be accepted with no proof. Renouncing the deal is renouncing the prophet. How does one stay faithful to TSLA stock, if one loses faith on the prophet?

That's the problem here:

  • If the deal goes through, then selling TSLA because of the increased risk is the rational thing to do.
  • If the deal does not go through, such requires losing faith on the prophet - it requires the believers to vote against Elon Musk. If one loses faith on the prophet, there is no reason to hold TSLA either.

Either of these outcomes is thus negative for TSLA, even if the deal being abandoned could lead to short-term relief for the stock. Of course, if the deal is abandoned SCTY might die right after, again testing the prophet's infallibility, but that's another thesis altogether.

Conclusion

Rationally, Tesla acquiring SCTY is a large negative for TSLA stock which should prompt more TSLA selling, since its risk will be greatly increased. Indeed, the deal going through might immediately wipe out more than half of the cash TSLA recently raised, if SCTY's covert noteholders force redemption of their claims.

However, if the deal does not go through, that might also be a negative for TSLA. This is so because rejecting the deal requires TSLA shareholders to lose faith on Elon Musk and vote against him. One of the main reasons to hold TSLA is simply having faith on Elon Musk.

Losing faith on Elon Musk has proven hard in the past, hence one could perhaps say that such makes it hard for the deal to fall through. Either way, TSLA looks to be in a lose-lose situation because of this deal.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.