Elon Musk is nothing if not ambitious. But his latest grand plan is getting widely negative reviews.
Tuesday evening he proposed having his electric car company Tesla (TSLA) buy his solar panel company SolarCity (SCTY) in a stock deal valued at about $2.5 billion. And he sees the combined companies as changing the world.
"The potential is there for Tesla to be a $1 trillion market cap company, if we play a major role in transitioning the world to a new form of energy generation, and storage and transport," he told investors Wednesday morning.
But shares of Tesla tumbled more than 10% in trading Wednesday following the announcement. And SolarCity, up 17% Tuesday night, closed up only 3% Wednesday amid doubts that shareholders will OK the deal.
Many analysts criticized the deal as a drain on Tesla at a time it is trying to dramatically ramp up production so it can produce its first mass market car, the Model 3, due to be available at the end of next year.
"The combined entity is likely to magnify the losses and cash burn that both were seeing individually," said Brian Johnson, analyst at Barclays. Tesla has reported net losses of nearly $2 billion in the last five years, while SolarCity losses total nearly $1.5 billion during that time.
Tesla recently sold additional shares of stock in order to raise cash it'll need to build the Model 3. Johnson said this deal makes additional stock sales likely as well, which will reduce the value of existing Tesla shares.
"However, this is contingent on the equity capital market remaining an open well for Tesla -- which is far from certain," he said.
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Many questioned the timing of the deal, just as Tesla tries to become a significantly larger automaker.
"We think this could potentially be an unneeded distraction. Tesla already is facing aggressive Model 3 production targets," said Colin Langan, analyst at UBS who was already advising shareholders to sell Tesla shares.
Musk, who is chairman of SolarCity in addition to being CEO of Tesla, insisted that Tesla buying SolarCity will not be a drain.
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"We expect it to be a net cash generator, not a user of cash," he told investors in the second call. He said this is important for the success of Tesla's non-car product, the Powerwall, a large lithium ion battery that can store electricity collected during the day by solar panels and power a house at night or on cloudy days.
"We need an integrated product," he said. "I think SolarCity has a great future independent of Tesla... but being able to integrate things....it makes things easier, not harder."
But there were lots of skeptical questions from analysts, including whether Musk will be able to convince Tesla shareholders to OK the deal.
"Your expectation of the future is probably correct strategically," analyst Sachin Shah of Albert Fried told Musk. "But people are ...looking more near-term and -- that's what the concern is, getting to a finish line."
