Tesla: Valuation Is a Sticking Point in Merger Talks With SpaceX

Key Morningstar Metrics for Tesla

• Fair Value Estimate
  : $475.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Very High

Tesla TSLA and SpaceX CEO Elon Musk has confirmed that the companies’ boards of directors are holding merger talks.

Why it matters: Musk said the talks came at the request of shareholders. He has previously said that he sees both companies’ businesses becoming increasingly complementary and connected.

• A Tesla-SpaceX merger makes strategic sense. Tesla will be a key battery and solar panel provider to SpaceX. SpaceX’s Grok will be the interface for humans to interact with Tesla’s autonomous driving software and humanoid robots. Starlink will allow Tesla to monitor these vehicles and robots.

The bottom line: We maintain our $475 fair value estimate for narrow-moat Tesla. Our valuation assumes Tesla remains a stand-alone company and a merger with SpaceX doesn’t alter our forecast for Tesla. We view Tesla shares as undervalued, with the stock trading in 4-star territory.

• We think valuation (specifically, the merger ratio for each company) is likely a sticking point in negotiations. The current market capitalization of the two companies puts SpaceX at a premium to Tesla. However, Tesla generates positive free cash flow and has a stronger balance sheet.
• Tesla shareholders likely want a higher valuation of its AI projects, including autonomous driving and humanoid robots. This is similar to our view that SpaceX’s valuation currently reflects a large valuation for its AI business. This could result in a premium for Tesla that values it at SpaceX’s level.

Between the lines: Even if both companies’ boards agree on valuation and the deal passes shareholder votes, we see regulatory risk from both the US and Chinese governments. SpaceX is a US defense contractor, while Tesla has manufacturing operations in China. This could prevent the deal from proceeding.