Elon Musk just kicked his shareholders in the teeth

Elon Musk, the CEO of Tesla Motors, just hung an albatross around his shareholders’ necks.

Through Tesla, Musk has made an all stock deal offer for embattled solar energy firm, SolarCity, which Musk co-founded.

He said that this deal would help to make Tesla the first “vertically integrated energy company offering end-to-end clean energy products to our customers.” SolarCity’s stock is up 20% on the news.

Now in case you haven’t been following the SolarCity story, it’s the company that, a few minutes before this deal was announced, Goldman Sachs said was the “worst positioned” for growth in its sector.

It’s a company that, aside from this M&A bump, has seen its stock collapse almost 60% since the start of the year and lowered guidance for the year down 16% during its last earnings call.

It’s also a company that is helmed by Elon Musk’s cousin, Lyndon Rive. Go figure.

Tesla’s stock, you should know, is down 10% in after hours trading.

Family resemblance

Aside from the Musk family and an obvious commitment to environmental sustainability, the most important thing these two companies have in common is cash burn. They do it a lot. In fact, SolarCity will add another $700 million bill on top of what Tesla already spends.

Statements like the following probably sound familiar to Tesla shareholders at this point: “We think reaching cost targets and positive cash flow by year-end will be key. We view SCTY’s business as high risk given its need to continually raise capital,” wrote an analyst at S&P Global after the SolarCity’s last earnings call.

Lyndon riveYouTube/Goldman SachsSolarCity co-founder and CEO Lyndon Rive

Because they sound like this (from a Morgan Stanley note):

“In our recent note and price target reduction to $333 from $450, we factored in a greater level of cash consumption into our earnings model in part to factor in higher levels of launch-related engineering expenses to ensure a high quality ramp of the Model X sufficient to deliver on our estimate of 15k units in 2016.”

Both companies also have a habit of overpromising and underdelivering. Tesla constantly misses on production (remember the Model X SUV?) and deliveries, and in a very similar way, SolarCity misses on bookings and installations. Bookings, for one, were down 33% in Q2 from the same time last year.

Come to think of it, both companies face major regulatory challenges as well. Just as Tesla has auto dealers to contend with, SolarCity has to face state regulators. It moved its business out of Nevada entirely after officials passed rules that raised prices on solar panels.

And then there’s this guy. But who cares about him?

Something you should know

Now, if you’re a Tesla shareholder and you’re new to this, you should probably also know that SolarCity is big on financing. The company just revamped its loan program to give more potential customers access to its products. The problem is, those new loans are at rates so attractively low that they hurt the company’s margins.

From analysts over at Credit Suisse (emphasis ours):

“Using SCTY’s recent introduction of the 20-year loan at 4.99%, we back into value creation metrics for the loan compared to leases. We estimate

considerable margin pressure from the loan product (~$0.48/watt in NPV) compared to the value potential of a lease system held on balance sheet (~$0.93/w in NPV assuming only the 20-year contracted period and a 6% discount rate; even at an 8% WACC we see the transaction as margin dilutive).”

On Monday Barclays downgraded SolarCity stock for this very reason. Analysts over there think that as consumer credit worsens, so does the company’s prospects. A potential rate hike from the Federal Reserve, which Barclay’s expects in August, also worried analysts.

Anyway, congratulations Tesla shareholders. Here’s your new baby.

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