The blowout news from SpaceX’s Q3 earnings wasn’t the rocket and AI giant’s outstanding performance that far exceeded even analysts’ elevated expectations, but Elon Musk’s revelation that SpaceX and Tesla are weighing a merger. On the call, held the evening of Oct. 20, Musk declared that his two signature holdings have each named “special committees” composed of independent directors to explore a union. Musk’s statement confirmed Wall Street’s long-held view that the deal was highly likely, and now—given that Musk effectively controls both companies and loves the idea (though as a “conflicted party” can’t serve on the committees), the tie-up looks all but inevitable.
The prospect of a SpaceX-Tesla combo got rave notices from the research crews covering both companies. In most cases where the acquirer is en route to paying a price amounting to a humongous P/E, its stock falls. Not this time. Investors applauded both enterprises, sending Tesla up 3.4% the day following Musk’s statement and SpaceX up 7.8%, adding $155 billion in market cap.
At first glance, their already tight kinship, and all their many overlapping businesses, suggest that a new SpaceX-Tesla makes sense. SpaceX buys Tesla Megapack batteries and Cybertrucks, Tesla invested $2 billion in xAI, bought by SpaceX in February, and they share ownership of the much-feted chip project Terafab. Not to mention that the deal would clinch Musk’s long-harbored vision of running a single colossus as a kind of Berkshire Hathaway of AI-driven tech. The wizard freed to blend these two great elixirs of innovation? What’s not to like?
A close examination of claims made for the deal, especially assumptions on its supposed advantages in bolstering the finances of both companies, points to an extremely risky wager that must perform never-before-seen heroics to reward shareholders. It’s the ultimate buy the leap of faith, it’s about the vision, not the numbers, never bet against Elon scenario, set against the sobering numbers. Let’s explore four frequently made arguments for what would prove the largest and, so far, probably the most universally praised merger in the annals of capitalism.
SpaceX-Tesla would be accretive to SpaceX shareholders
The idea is that while SpaceX profits are just starting to accelerate, adding Tesla’s earnings, generated from its bedrock EV and battery sales, would immediately raise the former’s earnings per share. In fact, it’s technically true: If the pair combined now, that’s how the math would work. The problem: The addition to SpaceX’s GAAP profits per share would be minuscule, and since SpaceX’s bottom line is growing and Tesla’s is dropping, the deal if done a year or two from now would prove extremely dilutive for the Starlink provider.
What stands out when you examine what SpaceX would pay versus what earnings it would get is how shockingly expensive the transaction would be.
One big question: How much of a premium would SpaceX offer over Tesla’s current price? As Rajat Gupta of J.P. Morgan points out in a report on the likely merger, that number in most tech acquisitions is 30% to 35%. So let’s posit 30%. Right now, Tesla’s market cap is $1.52 trillion; tack on 30%, and the transaction would cost SpaceX $1.98 trillion. SpaceX’s valuation stands at $2.14 trillion. We’re looking at almost a merger of equals. SpaceX would need to issue the equivalent of 92% of its current shares outstanding to capture Tesla. Hence, SpaceX’s count would zoom from 13.1 billion to 25 billion shares.
SpaceX would be awarding nearly half of its future earnings to Tesla’s selling shareholders. And what is it getting in return? We don’t know what the robots and self-driving cars will deliver, but we do know that Tesla booked just $3.28 billion in GAAP net profits over the past four quarters. Since SpaceX had a $1.5 billion loss over that period, the pro forma deal, as of today, would be “accretive” in the sense that buying Tesla would make the combined company slightly profitable. But SpaceX would just go from earnings per share that are a minuscule negative to a tiny positive.
What’s important is the amount SpaceX is paying for those earnings and puny accretion. It would be getting $3.28 billion in profits in exchange for stock worth $1.98 trillion. That’s $600 for every $1 in extra earnings.
To make matters worse, Tesla’s profits have been falling while SpaceX’s bottom line is taking off. In Q3, SpaceX reversed the three prior quarters of deficits by registering $4.4 billion in GAAP net profits, enough to lower its four-quarter loss to that $1.5 billion. In other words, profits are trending the right way, big-time. Via a merger, SpaceX would be sacrificing half of those fast-rising earnings to the Tesla shareholders, and getting what is for now a minimal contribution from Tesla. On the accretion argument, it looks like a bad outcome for SpaceX shareholders.
But overall, this would be a good deal for SpaceX, right?
Even if SpaceX didn’t buy Tesla, its valuation is so gigantic alongside its earnings that only by achieving stupendous growth in revenues and profits can it deliver shareholders an even decent return. In May, David Trainer of New Constructs provided a mathematical reckoning that at its current valuation of $2.14 trillion, SpaceX would need to be generating around $300 billion in profits on sales of roughly $1.6 trillion by 2035 to provide a competitive return. That’s a tall order, to put it mildly. The profits number would be almost a quarter more than what Alphabet makes now, on over three times its revenues.
The rub: A Tesla acquisition simply gives SpaceX a far steeper hill to climb, one that’s almost twice as steep.
If SpaceX shoulders a 30% premium, the combined companies would start life with a market cap of $4.12 trillion. (That’s SpaceX’s current $2.14 trillion plus the $1.98 trillion paid for Tesla.) SpaceX 2.0 would edge Alphabet ($4.0 trillion) and Microsoft ($3.9 trillion) to rank as the third-most-valuable enterprise in America behind only Nvidia ($5.3 trillion) and Apple ($5.0 trillion). By Fortune’s estimate, using Trainer’s methodology, SpaceX would need $550 billion in profits and around $3 trillion in revenue to ring the bell by 2035. That $550 billion target is over twice what Alphabet amasses today.
Once again, if Tesla were bringing already big and fast-rising profits to the table, the task wouldn’t be nearly as difficult. But it’s just the opposite. The EV-maker is providing exceedingly slender profits that have already declined from $15 billion in 2023, and $5 billion in 2024 to a run rate that’s two-thirds the figure of just two years ago.
Tesla would help SpaceX with what it needs most: Lots of cash flow to pay for its big, pricey AI adventure
Much of the attention on SpaceX’s financials focuses on its incredible cash burn that’s chiefly financing its ambitions in AI, or what it now calls “Super Intelligence.” In the first nine months of this year, SpaceX pocketed $13.1 billion in cash from operations, and lavished $48.1 billion in capital expenditures, of which $40 billion went to AI projects, chiefly the buildup in terrestrial data campuses and what it sees as tomorrow’s cash cow, AI data centers in space, for negative free cash flow of $15 billion. What’s more, CFO Bret Johnsen disclosed on the earnings call plans for $35 billion to $40 billion in investment just for Q4 alone.
SpaceX is seeking to raise an extra $40 billion in debt to help fund the campaign, but even fans on Wall Street question how SpaceX will attract the massive sums required going forward, estimated by Morgan Stanley at $230 billion over the next three years. In its previous incarnation as an EV specialist, Tesla could have helped. Until this year, it typically provided large amounts of free cash flow. But now that Musk has repurposed Tesla as a robotics and self-driving franchise, it’s in a position similar to that of SpaceX, though on a lesser scale.
In April, Musk shocked the markets by declaring that Tesla would spend an immense $25 billion on capex this year. Indeed, the number ramped rapidly, and Tesla registered negative free cash flow in Q2. But Q3 was a surprise. Capex came in lower than expected, as Tesla’s cash from operations exceeded its investments by $1.1 billion. Musk also disclosed that Tesla was cutting its capex target for the year from $25 billion to $20 billion.
Still, that goal implies $7 billion in capex for the final quarter of this year, a big number almost certain to at least match, if not exceed, cash from operations. On the call, Tesla CFO Vaibhav Taneja stated that investment spending will accelerate in the years ahead to back expansion of the robotaxi fleet; build capacity for production of Optimus robots; and ramp AI infrastructure capacity—all pointing to a likely long period of negative free cash flow. The upshot: Tesla is no longer generating free cash flow, and given its own big investment plans for robots and robotaxis, can’t help plug SpaceX’s huge cash flow deficits.
So putting SpaceX and Tesla together unites two companies that are super-hungry for cash. If you simply extrapolate the numbers, it’s likely that SpaceX and Tesla combined will spend close to a staggering $50 billion on capex in Q4, and their businesses won’t come close to covering that number. Looking forward, adding Tesla will simply make a new SpaceX’s huge need for cash far more acute.
A sale to SpaceX would be a great deal for Tesla shareholders, correct?
This one gets a ringing endorsement. Tesla’s shares now look vastly overvalued versus the basics. At its current market cap of $1.52 trillion, Tesla is selling at a P/E of 633. Shareholders are getting one-sixth of a penny in earnings for every dollar they own in Tesla shares. And Tesla’s core, repeatable profits are actually lower than the reported numbers. In many quarters, they drop considerably when you back out sales of regulatory credits, a category Musk himself says will disappear, and unrealized gains on its SpaceX stake. So what explains this phenomenon where profits keep falling and the market cap remains in the stratosphere? As investor Steve Eisman of Big Short fame explained to me in a recent story, it’s the prospect of a full-price buyout from SpaceX that’s supporting Tesla shares. Says Trainer, “A SpaceX deal is the only way to bail out Tesla shareholders.”
So if SpaceX indeed buys Tesla, it’s the Tesla owners who will prove the winners. And that’s the outcome they’re counting on. The losers will be SpaceX’s current shareholders that trade almost half their company for puny profits and big promises.
This story was originally featured on Fortune.com
Hence then, the article about elon musk s dream merger is a nightmare for spacex shareholders was published today ( ) and is available on Fortune ( Middle East ) The editorial team at PressBee has edited and verified it, and it may have been modified, fully republished, or quoted. You can read and follow the updates of this news or article from its original source.
Read More Details
Finally We wish PressBee provided you with enough information of ( Elon Musk’s dream merger is a nightmare for SpaceX shareholders )
Also on site :
- Netflix, Bengali Streamer Hoichoi Partner to Bring Series to Hindi, Tamil and Telugu Audiences
- Le Creuset’s ‘Beautiful and Versatile’ Cocotte Baking Dish Makes a ‘Great Gift’ and Is Just $22 Ahead of the Holidays
- ‘Nobody Wants This’ Season 3 Review: Kristen Bell and Adam Brody’s Netflix Romance Levels Up but Can’t Ditch Old Habits