A few weeks back, I took a stab at finding the vertical integration benefits of the proposed Tesla (NASDAQ:TSLA) acquisition of SolarCity (NASDAQ:SCTY) - and found few. I did provide some "asks" that would help me (and hopefully others) have a greater understanding of true value levers and the dollars associated with them, namely:
· Tesla's estimate of incremental Powerwall cash flow benefit derived through a Tesla/SolarCity combination.
· Quantification of sales cost reductions on a sales cost per revenue basis.
· Conceptual understanding of the dollar benefits derived from Tesla's perceived knowledge transfer of manufacturing expertise to SolarCity.
My first (and second) reading of the Master Plan, Part Deux (MP2) certainly provides no quantification of any of the above. Furthermore, and perhaps more troubling, there was actually little focus at all on the perceived vertical integration benefits that should be the basis for justifying the Tesla/SolarCity deal. Instead, I emerged with a strong sense that Musk's ambitions are far more oriented toward all things transportation, with residential solar energy plus storage playing second fiddle. In fact, three of the first talking points from Master Plan 1 (MP1) also are focused on electric vehicles.
In MP2, cars and vehicles are mobile robots and potential profit centers - driverless Uber cars. They happen to run on electricity (actually electricity stored in batteries), but their economic mobility is far more dependent upon the capacity of their batteries and the ability of those batteries to be charged quickly.
MP2 also points to the important and noble ambition of "accelerating the advent of sustainable energy." I am an energy guy, not a car guy. However, is individual ownership of automobiles (electric or not) a realistic sustainability plan for a planet with 7 billion plus people? No. However, having those people who are using cars drive economic electric vehicles is certainly a sound, albeit small element of a sustainable future.
On the energy side of the house, residential rooftop solar is neither the best nor lowest cost path to sustainable energy supply. Nor is it a business that has significant barriers to entry. SolarCity may have the largest market share in the U.S. However, they've not demonstrated an ability to execute profitably over the long term and are overly impacted by government policies and subsidies.
I remain of the opinion that Tesla's greatest opportunity for value creation lies in battery design, development, and manufacturing - for electric vehicles, homes and businesses. Cost-effective energy storage is critical to a sustainable energy future to compensate for the time of day mismatch between renewable energy supply and energy demand. It is not farfetched to envision idle electric vehicles as energy supply centers.
Implicitly, and as noted in my previous post, a Tesla/SolarCity combination suggests limiting Powerwall and similar storage and connectivity technology to SolarCity customers. Tesla could instead focus its energy ambitions on being the battery supplier of choice for all e-vehicle manufacturers and the home energy storage system of choice for all renewables developers. MP2 paints a futuristic vision of car sharing for dollars. How about "tapping a button on the Tesla Phone app" to find out who has spare energy in their car battery that is available for consumption?
I wonder if dis-integration is actually the best value creation strategy for Musk. Namely, keep SolarCity separate and apart, spin-off Tesla Power, and have Tesla Motors remain as a stand-alone. This would truly carve out the major value platforms for Tesla and SolarCity while maximizing future market opportunities by allowing for both internal and external sales.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.