The Bullish Case for the Tesla / Solar City Merger

The Bullish Case for the Tesla / Solar City Merger

This week, Tesla Motors (TSLA) announced an all-stock offer for SolarCity (SCTY). The transactions would create a vertically integrated sustainable energy company with Electric Vehicles (EV), storage, efficiency, demand response, and solar capabilities. Some have described the move as complex, or a distraction, but I believe that this could achieve the dreams that Elon Musk has of a company that is more valuable that Apple (AAPL) in the future.

As the industry reaches more than a million systems across the US this year, the solar market has reached critical mass. At the same time, the EV market, while starting from a low base, will surely meet goals of one million cars on the road in this decade. However, the deployment of cost effective technologies is not accelerating fast enough. From smart thermostats to high efficiency heat pumps, the time that it takes to deploy proven technologies at scale is too long. The business model needs shaking up – “Old is New”. Out is search engine optimization and email spam -- replaced by actual salespeople and showrooms selling solar power and electric vehicles.

The market potential could be enormous. Tony Leiserowitz, the Director for Yale’s Program on Climate Change Communication, has done extensive studies noting in his six Americas study that almost 13% of the US population is “alarmed” by climate change.  Given that only 1% of residential consumers in the United States have solar on their roof and less than that have electric vehicles, there is the potential to unveil a combined “climate change package”. 

Today, the solar only package isn't cost effective in all 50 states. Solar power sold with loan products could be cost effective and legal to deploy in about 20 states representing about 50 percent of the US population. On the other hand, Tesla’s Model 3 offering is cost effective to anyone in the market. The average American spends over $9,000 per year on each vehicle they own – including car payments, insurance, fuel, and maintenance. This is almost $800/month, far more than the fully burdened cost of a new Tesla Model 3. If there was a combined solar ($20K), EV ($30K), and efficiency ($5K) package SolarCity could cost effectively sell into all 50 states.


So how big is the market for this package? Today, 1 out of every 7 homes in Australia has solar on their roof. This transition spanned 2009-2014. With over 60,000,000 eligible US households, if Tesla/SolarCity could help the USA match the solar penetration of Australia, you would achieve an initial package revenue of over $470B – more if the Model S were substituted for the Model 3. There is no reason to believe that the solar industry couldn’t achieve the same market penetration in the USA by 2021.


Assume the target households pay an average of $200/month for their electricity/gas bill and $800/month to own, fuel and maintain their car. Tesla/SolarCity could provide a 20-year loan to customers with a payment starting at $900/month (initial savings of 10 percent) for the next twenty years. At an average interest rate of 11 percent across their consumer base, consumers could afford a $100K package. This would include a solar system, energy efficiency, multiple cars, and all of the maintenance and other services over 20 years. The gross margins for the company should be at least 20% on the first costs and 50% on the additional services.


Now Elon Musk didn’t say any of this on their conference call. Heck I’m not sure that he has even thought through how to do what I’ve described. But with climate change solutions representing the largest wealth creation opportunity of our lifetime, the world is waiting for someone to simplify decarbonisation for consumers. Who better to do it than Elon Musk?

Nikhil Daftary

EVP Product || Product Strategy | Product & Customer Experience | Plant Based Advocate | Maker of Pizza

7y

Jigar, nice take on the financial / financing perspective of the solar roof. The rollout of the roof will be really interesting to see. My question is, will Tesla iterate on their solar tech as quickly as they did from roadster to model 3? Tesla is unveiling their first product in this area. I'd be surprised if they'd ramp production to the level of hype and expectations of the solar roof. With Tesla Motors, Elon started with the roadster, a high-performance sports car, meant to prove specific tech and establish a brand. That model has taken us to today, 8 years later, to a mid-size, consumer friendly, significantly lower cost, and significantly higher-tech model 3. Why wouldn't they apply the same model to solar? Tesla's Solar Roof is the Roadster of solar - a combination of proven technology into a new marketplace. The number of homes that would qualify for v1 of this is going to be small: utility bill, utility co, shading, etc.. Even psychographics are going to be a huge limiter A complete roof rebuild with a completely non-traditional roof build, is something tech and environmental enthusiasts will risk - not the average homeowner. Keeping in mind that solar only has a ~1% market adoption in the US, there is a LOT of room for new ways to think about solar. This is after 20+ years of large inverters & bulky panels. Only in the past 3 years, have we gone from bulky and funky to streamlined and sleek. The timing is perfect to start testing the waters with something significantly higher performance. While financially the model will make sense, I'm more in the mindset that what we see from them in the next few years will be better look of their solar future.

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Grant Gerke

A business editor and content marketer with years of expertise in manufacturing (food & auto), automation, recycling, and packaging; also EV Content Consultant | Content Writer | Ghostwriting | Freelance & Contract

7y

Sold, I already have the Model S...ready

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Bill Conlon

President at Pintail Power

7y

"almost 13% of the US population is “alarmed” by climate change. ... Assume the target households pay an average of $200/month for their electricity/gas bill and $800/month to own, fuel and maintain their car." I have been concerned about climate change since my first Nuclear Engineering course in 1973, and have spent my professional career reducing CO2 emissions, so I fit the target population. But my most recent electric & gas bill was $138, including charging my leased Volt. So my monthly costs are less than 1/2 your assumptions, so it will be hard to deliver savings to me. I would speculate that very few of the 13% are spending $1000 on electricity, gas, and automobiles (insurance doesn't count --- since you pay for that even with a Tesla). So your idea may be a very heavy lift. The equity markets seem to think that synergies between TSLA and SCTY will not materialize. But one truism of renewable energy remains: the second owner makes money (after bankruptcy). Maybe there will be an opportunity in distressed assets?

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Norman H Koo

Member, Advisory Board at Alan AI, Inc and Computer Science Dept, University of Wisconsin-Madison

7y

Very insightful comment Mike! The Solar industry is a cash drain and none has come up to scale or gain traction/profitability. Company should stick to their own core competency/industry!

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Robert H. Mahan

Technical Program Manager

7y

I would think if you look at what Elon wants to achieve, green energy. The car is a vessel for the core business batteries, and the means to charge them through green means is a perfect fit. Tesla is green company via cars, it makes common sense.

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