The Twelfth Magpie weighs a possible SpaceX-Tesla merger

Musk’s merger idea and the companies involved

The Twelfth Magpie reports that SpaceX, formally Space Exploration Technologies, trades on Nasdaq under the symbol SPCX, while Tesla trades as TSLA. It says Elon Musk is the largest shareholder in both companies and has suggested a merger, which could mean the two businesses becoming one. The article says the idea may not make sense at first because the companies operate in different sectors.

The piece says Musk does not describe Tesla simply as an electric vehicle maker. Instead, according to the article, he sees it as a technology company whose future lies in robots and artificial intelligence. The article also notes that the two companies recently came together in the unveiling of a prototype rocket-powered car.

Valuation concerns and how a deal might work

The Twelfth Magpie says the writer has never owned Tesla shares and has long considered the company overvalued. Based on Tesla’s past four quarterly earnings reports, the article says the stock was trading on 216 times earnings and 14.2 times revenue as of 2 November. It adds that, if Rolls-Royce were valued the same way, its shares would be changing hands for 198% to 507% more.

Because of the relative size of Musk’s two companies, the article says any deal would probably involve SpaceX acquiring Tesla. It adds that takeovers usually include a premium for the target company’s shares, which in this case would make Tesla even more expensive.

SpaceX’s business and why the author still likes it

The article says the writer recognizes a possible hypocrisy because he also owns SpaceX shares. It says SpaceX is valued at 62 times revenue and is still loss-making, which the author calls generous, though less extreme than Tesla’s valuation. The article says the writer only has a small holding in SpaceX.

Despite the hype around some of Musk’s ideas and the need for billions of dollars to fund capital spending plans, the article says the author believes SpaceX has significant potential. It points first to Starlink, the company’s satellite internet business, which the article says is profitable and growing quickly. It also mentions Starshield, Starlink’s commercial version, which the article says recently made headlines because it appears to be an important part of Ukraine’s defense against Russia.

The article also discusses Starship, which it calls the world’s most powerful rocket. It says Starship recently reached space for the first time and could lower the cost of putting cargo into orbit enough to open the door to floating data centers.

Why the author is less positive on Tesla and on a merger

By contrast, the article says Tesla has not sold any robots and that its vehicle sales are falling because of competition from China. The writer says a merger or takeover could help cover up weaknesses in Tesla’s business, but also says many standard motives for mergers do not seem to apply here, including raising market share, entering new markets, diversifying, gaining more supply-chain control, or removing competition.

The article says there could still be some upside from scale and from combining technical knowledge. It adds that the two companies are already working together on Terafab, an effort focused on semiconductor development and mass production.

The writer says he is not enthusiastic about a deal and that it does not change his views on either company. He says he might feel differently if his SpaceX stake were much larger, since he would then have more to lose if SpaceX paid too much for Tesla. The article ends with the writer saying he thinks SpaceX is a stock to consider, while Tesla is not for him. It also includes a promotional section about a separate stock report and a disclosure that James Beard owns shares in Space Exploration Technologies and Rolls-Royce Holdings plc.