The case for Elon Musk to combine Tesla with SpaceX

Key Points
  • Tesla and SpaceX may grow closer together in the future.
  • Factors such as competition from other firms, future financial challenges, and the opportunity to share knowledge and businesses, could push Tesla closer to Elon Musk's other major company.
Elon Musk, founder and CEO of SpaceX
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Tesla and SpaceX could grow closer in the future and possibly even combine, says one analyst.

Tighter collaboration between Elon Musk's two largest companies could help Tesla fend off competition and access capital while allowing both companies to share resources and information and collaborate on new businesses, said Morgan Stanley analyst Adam Jonas in a note sent Tuesday.

To be sure, there are no stated plans to merge the two companies. But Musk and other Tesla executives have said SpaceX and Tesla have worked together in the past.

Strategic partnerships, shared technology, or even a combination of the two companies are ways the two companies could become more intertwined, Jonas said.

One reason it may make sense for Tesla to collaborate more or even combine with SpaceX is that it may become increasingly difficult for Tesla to continue as an independent company, Jonas said.

For example, the company could soon face stiff competition from established automakers and deep-pocketed tech firms. Large tech firms in particular will have "arguably superior access to capital, talent and business models that can monetize vehicle data and content opportunities," he said.

Tesla already has intense capital needs. Bernstein analyst Toni Sacconaghi said he expects the company to burn $4.7 billion in 2017 alone, as the company expands production on the Model 3 and invests in other businesses.

But there seems to be no "apparent natural buyer" for Tesla, Jonas said. The capital intensity of Tesla's business and other economic and political factors, such as barriers to foreign ownership, leave few likely candidates.

But a tighter relationship with SpaceX could allow the companies to share resources, and perhaps offer Tesla access to capital. SpaceX bought some of SolarCity's debt before Tesla purchased the solar power company. SpaceX's launch business appears to be in a "highly dominant position," according to Jonas' models, and the company looks well-positioned to enter "highly profitable" markets, such as proprietary satellite broadband.

Musk already divides his time between the two companies, and he may further reduce his time at Tesla to focus on SpaceX. This poses a risk for Tesla as many investors consider Musk to be essential.

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"In our view, Tesla's 'key man' risk is higher than any other company we cover, possibly rivaled only by Sergio Marchionne at [Fiat Chrysler Automobiles] ," Jonas said. "Investors widely expect Elon Musk to, over time, devote increasing amounts of his time and talents to SpaceX, raising the very real question of who could replace him at Tesla. A combination of efforts between the two firms could address this important issue."

SpaceX and Tesla have also collaborated in the past, and there may be increasing degrees of technological overlap between the two businesses, Jonas said.

For example, Tesla consulted a SpaceX team for help addressing a service issue that involved aluminum casting, which SpaceX knows a lot about from rocket manufacturing. The solution SpaceX came up with saved Tesla eight hours of work per car, said Musk on Tesla's second-quarter earnings call in August.

Space and automated driving are also commonly listed as businesses where the increasingly important fields of artificial intelligence and machine learning can benefit hardware and software development.

Furthermore, SpaceX plans to create its own satellite network — which Tesla could use for transmitting data throughout its fleet.

"There's cross-fertilization of knowledge from the rocket and spacecraft history to auto back and forth is — I think has really been quite valuable," Musk said on the second-quarter earnings call, which Jonas cited in his report.

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