A SpaceX and Tesla Merger Will Only Be Successful If This One Thing Happens

Space Exploration Technologies (NASDAQ: SPCX) and Tesla (NASDAQ: TSLA) are both exploring a merger between the two companies. While both have been run separately by Elon Musk for years, the eccentric technology founder now believes it may be ideal to have the two businesses under one corporate umbrella. Each business has a separate committee exploring the prospects of a deal.

Increasingly, the companies are collaborating on projects, including the recently announced Terrafab semiconductor production venture. If a merger between the two companies is to be consummated, semiconductor manufacturing is key to lasting success. Here's why.

Scaling chip production

Terrafab is just an idea today, a joint venture formed between SpaceX, Tesla, and Intel, with Taiwan Semiconductor Manufacturing rumored to be in talks to join the project. Musk and the team have plans to build a massive manufacturing base in Texas for computer chips.

These chips will power the future of Tesla and SpaceX products and are a reason for the merger. These could include Tesla electric vehicles, the Optimus humanoid robot, Starlink satellites, and the data centers SpaceX is beginning to build for artificial intelligence (AI).

However, this is a long-term project, with production not planned until 2028 at the earliest. When this happens, SpaceX hopes to have engineered the ability to produce space-based data centers at a lower cost-to-serve than terrestrial competitors. If it can do so while powering these data centers with its own computer chips, this vertical integration could be a valuable competitive advantage for the combined SpaceX-Tesla business.

Image source: Getty Images.

Tesla's financial state

The question remains: Why is Tesla needed for this space-based data center project, which is powered by internal computer chips? Sure, Tesla could use Terrafab's computer chips for its vehicles or to train its AI models for self-driving cars, but this isn't something it needs to do internally for the business to function, and it has nothing to do with SpaceX's ambitions.

What Musk and SpaceX likely want from Terrafab and the forthcoming Tesla and SpaceX merger is the cash on Tesla's balance sheet, which numbered $45 billion at the end of last quarter. However, the Tesla business itself is struggling, with operating income falling 56% last quarter. Revenue is not growing either, with promises of self-driving technology and the Optimus humanoid robot not appearing on today's financial statements.

It is not necessarily what SpaceX can do for Tesla, but what Tesla can provide to SpaceX in the form of capital, that is the reason for this merger exploration.

Should the two companies even merge?

If a Tesla-SpaceX merger occurs, much will rest on this Terrafab joint venture to ensure its success. It is part of a grand plan by Musk and SpaceX to build a massive orbital satellite and AI data center network. However, there are a ton of steps that need to occur before this happens, such as proving that Terrafab can actually manufacture working chips or getting orbital data centers functional.

Adding Tesla to the picture under one corporate umbrella might just make the story messier than it needs to be. There are many uncertainties in the story involving both companies. Sure, SpaceX could use Tesla's cash balance to fund its growth ambitions, but that should not be the only reason for a merger. Terrafab is an interesting idea, but all it is today -- along with many other business lines at Tesla and SpaceX -- is an idea, one that faces huge upfront capital commitments and technical challenges.

Plus, from an investor perspective, both stocks trade at premium valuations. Tesla's price-to-earnings ratio (P/E) is in the hundreds, and SpaceX trades at a $2 trillion market cap compared to trailing revenue of $33 billion. A merger may make sense if you believe in the Terrafab project, but there are so many uncertainties across the board with these two businesses that I think both stocks are ones to avoid right now.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.