Tesla and SpaceX's Likely Merger, Portfolio Change
During Tesla’s earnings call on Wednesday this week, there was a very interesting discussion on the topic of whether SpaceX and Tesla will eventually be merged. When the analyst asked the question, I’m not even sure he was expecting an answer that almost confirms that such a merger is perhaps a question of when, not if. In response to the question about potential synergy between Tesla and SpaceX, this is what Elon Musk and Brandon Ehrhart (Tesla’s General Counsel) said:
Elon Musk
as you can tell from the many collaborations on so many fronts with SpaceX and there’s a lot -- there’s more and more overlap, especially with Terafab, that’s really going to be a gigantic project.
So -- but obviously, we can’t talk about combining companies and that kind of thing on an earnings call. It’s got to be done with the appropriate process. And with that, I’ll turn it over to Brandon, our General Counsel.
Brandon Ehrhart
that’s exactly right. We continue to benefit from our relationship with SpaceX, and we’ve -- they’ve been a great partner, and we have numerous beneficial transactions with them. And earlier this year, we deepened our relationship through an investment and a framework agreement. This will allow us to continue to work with them on projects that Elon mentioned like Terafab and Digital Optimus.
Elon Musk
Yes. And there’s many other things, too. Obviously, you’ve got Grok in the car. So -- and Grok helping drive Digital Optimus. You also got Starlink being integrated into the Cybercab and Starlink will be integrated into all of our vehicles, at least for markets that Starlink is active. Because for a robotaxi situation, you need to have coverage everywhere. And there are many places even in Silicon Valley where the cellular coverage is terrible or sometimes nonexistent, which is surprising for Silicon Valley. But I know when I want to drive to work with the first 10, 15 minutes, I can’t actually do any calls because the cellular connectivity is so bad.
So we can’t have robotaxis getting stuck in these like Bermuda triangles of lack of cellular connectivity. So Starlink with its ability to do connectivity anywhere is actually quite important. So we don’t have robotaxis missing in action. And then obviously, if people are sitting in the car that they’re going to want to do high productivity stuff or entertainment. And with Starlink, you can watch 4K live sports in the car and with very low cost per gigabyte of data that’s really not feasible via the cellular system. And there’s many other situations.
That's perhaps about as loud as a CEO can wink without formally announcing a merger. If I were either SpaceX or Tesla shareholder, I think I would actually welcome the merger.
The reality is Neither of these companies is best understood or valued on their current core operating businesses. Both companies are essentially a portfolios of deep out-of-the-money call options attached to a cash-generating core. Given the cash generating core today doesn’t really come anywhere close to explain their current valuation, investors are likely paying hefty premium for the deep-out-of-the-money call options.
To realize the full potential of such call options, both Tesla and SpaceX may need to deploy gargantuan amount of capex in the coming years. Tesla’s unsupervised FSD or robotaxis, Optimus, SpaceX’s orbital data centers, and frontier model ambition, or their joint Terrafab project…all of these call options seem pretty capital intensive. And it’s really hard to know which of them will take off at what timeframe. Given such uncertainty, it may indeed make sense to have all the call options under the same roof and then add fuel to the ones that actually start to pan out. I have no idea about the probability of success of any one of such call options. In some ways, Elon Musk’s companies increasingly seem to be “Berkshire inverted”. Buffett assembled a portfolio of short-vol cash streams and used float to buy more of them; following the very likely merger of Tesla and SpaceX, MuskCo mostly appears be a portfolio of deep-out-of-the-money calls funded partly by an industrial float but perhaps increasingly more and more be the generosity of the strangers by their willingness to pay such a hefty premium for a portfolio of deep-out-of-the-money call options. I wouldn’t touch it anytime soon, but I would also not bet against the possibility that if a couple of the call options come to fruition, that may “justify” the valuation of MuskCo in the coming years.
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Please note that these are NOT my recommendation to buy/sell these securities, but just disclosure from my end so that you can assess potential biases that I may have because of my own personal portfolio holdings. Always consider my write-up my personal investing journal and never forget my objectives, risk tolerance, and constraints may have no resemblance to yours.
After going through Alphabet’s earnings closely, I have decided to add another ~120 bps to my existing Meta position. I will expand on my rationale below.