Why a Merger With Tesla Could Be a Disaster for SpaceX
Key Points
After another quarter of flat revenue growth, Tesla's valuation looks hard to justify.
The autonomy components of its business, like Optimus and full self-driving, seem to be valued at over $1 trillion.
SpaceX investors would be better off waiting for the company to launch these products.
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You can't say it wasn't predictable, but will it really happen?
Investors have long speculated that Elon Musk could combine his two trillion-dollar companies, Space Exploration Technologies (NASDAQ:SPCX) and Tesla (NASDAQ:TSLA) now that SpaceX is publicly traded, and just four months after SpaceX's IPO, Musk has expressed interest in doing so. Earlier this year, SpaceX acquired xAI, Musk's AI company, another sign that he is trying to consolidate his empire.
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The boards of Tesla and SpaceX have formed special committees to determine whether a merger is in their best interest. Musk is not participating in the review, having recused himself, though he did call a combination of the two companies "a good idea," citing operational synergies in AI, chip manufacturing, robotics, and other areas.
However, there's one simple reason why SpaceX investors may want to avoid a merger with Tesla. Elon Musk's EV company looks grossly overvalued.
Image source: The Motley Fool.
Tesla's valuation problem
Third-quarter earnings are now in for both SpaceX and Tesla, and while SpaceX reported revenue more than doubling, thanks to the explosive growth of its AI infrastructure business, Tesla just reported a quarter flat revenue growth at $28 billion. Automotive revenue was down 3% to $20.5 billion, while services was the only one of its three business segments to report growth. Total deliveries of Tesla vehicles fell 2% to 486,532.
Tesla investors and others who watch the stock will know this isn't a new pattern. On a trailing four-quarter basis, Tesla's revenue has been roughly flat since 2023.
Demand for its EVs seems to have plateaued for a number of reasons, including new competition, concerns about range anxiety from later adopters, and Musk's own involvement in politics. Plateauing growth wasn’t Tesla's plan though, as Musk said in 2021 that the company would increase its production by 50% annually, though it eventually stepped back from that forecast after badly missing it starting in 2023.
More recently, Musk has been shifting investor focus to autonomy, namely its self-driving cars and Optimus autonomous robots, though Optimus is not on the market yet, and Tesla's full self-driving requires driver supervision.
Musk's promises, which include that Optimus will be "the biggest product on earth,' have helped keep the stock price elevated. Tesla now has a market cap of $1.53 billion and a price-to-earnings ratio of around 200.
Its valuation is almost entirely based on future products, but the company keeps delaying the timing of their market launch.
What SpaceX gets from Tesla
Tesla's technology infrastructure and its development thus far on products like Optimus and full self-driving are worth something, but they seem to be currently valued at a $1 trillion or more, given the flat growth in the overall business.
A merger between SpaceX and Tesla would hide that bloated valuation from investors, benefiting Musk. At this stage, SpaceX investors would seem to be overpaying for Tesla in a merger, and that could hold the combined company back, especially if products like Optimus fail to live up to Musk's expectations.
Musk says that Optimus will ramp up production next year. Let SpaceX investors wait to see what demand for the humanoid robot will really look like. Meanwhile, the Tesla chief has made endless promises about vehicle autonomy being around the corner, but Alphabet's Waymo has rapidly expanded around the country, while visions like the Cybercab have yet to pay off. Notably, Alphabet's stock doesn't seem to reflect Waymo's growth in any way.
Right now, a merger between SpaceX and Tesla would shortchange SpaceX investors, diluting them for an overpriced asset. SpaceX has plenty of its own risks, but it is growing rapidly thanks to its new AI infrastructure business, and Starlink is a clear profit center.
At this point, SpaceX investors should reject a merger with Tesla, at least until either Tesla's price comes down or the company shows that it can move the financial needle with one of its two autonomy businesses.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.
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