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SolarCity Acquisition Increased The Value Of Tesla Shares To $22

|Includes: Tesla, Inc. (TSLA)

Tesla (NYSE: TSLA) released it's 10-K yesterday, for the first time showing the balance sheet of the combined company after the acquisition of SolarCity. In this article we'll take a closer look at the combined balance sheet to determine how the acquisition of the solar company has influenced Tesla's net worth.

The net worth, also called book value, is a specific metric, defined as assets minus liabilities, which gives an objective view on what a company is actually worth today.

If things would go terribly wrong, the assets would be sold and the proceeds would, after paying the liabilities, be distributed among the shareholders. That's what the net worth represents.

At the end of last quarter the balance sheet of Tesla showed $22.66 billion in assets and $16.75 billion in liabilities, resulting in a net worth of $5.9 billion.

Let's first see how this net worth has been evolving over time (numbers in 1000's).




net worth





































The graph clearly shows the capital raises Tesla has done in 15Q3 and 16Q2. A capital raise increases the assets (cash position) without increasing the liabilities, so it obviously results in a jump in net worth.

Apart from those jumps Tesla's net worth tends to show a decline from quarter to quarter, meaning its liabilities increase at a faster pace than its assets. That's what 'burning cash' does to the value of a company.

In 16Q3 Tesla managed to break this trend by showing a slight improvement in net worth. Their effort to push out a "good quarter" actually increased their net worth.

SolarCity's leasing business

So how about 16Q4? Tesla paid for SolarCity by issuing new Tesla shares, so the effect on net worth is somehow similar to that of a capital raise. But how to quantify this effect?

To acquire SolarCity Tesla increased its number of shares outstanding from 149.82 million to 161.09 million. At the end of 16Q3 the net worth divided by the number of shares outstanding was $19.97. At the end of 16Q4, after the acquisition, it was $36.71. At first sight, that's a nice increase, even if it came with an increased debt ratio.

But there is an issue, which is that the value of SolarCity's leasing business is not well represented by the balance sheet.

Assets on the balance sheet are supposed to reflect the value of "things" owned by the company.

If the company buys a building, its value is put as an asset on the balance sheet, assuming it would be possible to gain that amount of money when selling the asset again.

If the company builds a car that remains in inventory, the direct cost that has been made to build that car is put on the balance sheet. By selling the car, the asset can be turned into money again.

With "Solar energy systems, leased and to be leased, net" that's not quite the case.

In this line on the balance sheet the company shows the cost that has been made by SolarCity to buy and install the solar panels that are being leased to customers. Nothing wrong with that, but if things would go wrong, these assets can't be sold like other assets on the balance sheet.

Net present value

The value of these solar panels is determined by the contracts Tesla has with both its customers and investors, rather than by the cost the company has made to build them.

To benefit from incentives the company had to create joint-ventures with investors, who then could benefit from tax reductions. In these contracts the investors are supposed to own the panels at first, so they can claim the tax reductions. Gradually this ownership is shifted again to SolarCity. In the mean time all cash generated by the lease contracts is distributed between the investors and the company, in a way that the investors get a sufficient return on their investment. The specific terms have never been released as SolarCity considered them to be an advantage against competitors.

Anyway, in the article "Tesla Is Grossly Overvaluing SolarCity" we dissected these contracts by using SolarCity's own numbers to show that these assets, which were at the time on the balance sheet for $5 billion, had in fact a net present value of just $2.37 billion. When adjusting the number to 20 year leases (SolarCity assumed all contracts would be extended to 30 years) this NPV was further reduced to $1.38 billion.

To get a feel for Tesla's true net worth at the moment, we want to replace the "Solar energy systems, leased and to be leased, net" line on the balance sheet with its NPV, which is its true worth to investors.

For simplicity (Tesla didn't provide new NPV projections anymore) we'll use the $1.38 billion and $5 billion number to set the NPV at 28% of the number represented on the balance sheet.

That means, we'll replace "Solar energy systems, leased and to be leased, net", which is valued at $5.92 billion at the end of Q4, by a NPV of $1.66 billion.

At the same time we have to remove the nonrecourse debt, which is $1.95 billion, as the repayment of this debt is already part of the NPV calculation.

With these adjustments the net worth at the end of Q4 becomes $5.91 billion - $5.92 billion + $1.66 billion + $1.95 billion = $3.6 billion

With 161.09 million shares outstanding that's a net worth of $22 per share.

Operational cash burn in Q4

Of course the change in net worth between Q3 and Q4 has not only been determined by the acquisition of SolarCity. We saw a slight improvement in net worth in Q3. So how would Tesla have done in Q4 without SolarCity?

Let's take our old but reliable calculator once more.

On page 74, Tesla's 10-K shows the fair values of the assets acquired and liabilities assumed from SolarCity.

They show $8.51 billion in assets and $5.22 in liabilities.

When we deduct these numbers from Tesla's balance sheet at the end of Q4 we get a feel for what the balance sheet might have looked like if SolarCity had not been acquired.

Assets = $22.66 billion - $8.51 billion = $14.15 billion

Liabilities = $16.75 billion - $5.22 billion = $11.53 billion

Net value = $14.15 billion - $11.53 billion = $2.62 billion

This number would have corresponded with a net worth of approximately $17.5 per share.

That means the presumed net value shows a decline from Q3 which is in line with the huge operational cash burn we saw in Q4 and further confirms the Q3 push to be a one off event which could not be sustained.


The numbers show the SolarCity acquisition slightly improved Tesla's net worth, from what would have been $17.5 per share to $22 per share, or even $36.71 per share if you take the balance sheet at face value.

Apart from that, Tesla's normal operations keep lowering the company's net worth quarter over quarter. For people who love to compare Tesla to Amazon: this is where both companies are very different. It also shows Tesla's continued dependency on capital raises.

With a share price of $250 and a net worth of $22 per share our opinion remains that Tesla is slightly overvalued.

Disclosure: I am/we are short TSLA, OWNING PUTS.