SpaceX may have missed its window to buy Tesla

On the Tesla Q2 earnings call the evening of July 22, an analyst asked Elon Musk the question that’s top of mind for shareholders in his two largest ventures: Is SpaceX planning to buy the EV, battery and robot-maker? Musk responded that “We can’t talk about combining companies and things like that on an earnings call. It’s got to be done with the appropriate process,” an answer that did nothing to lessen the chance that he’s seriously mulling a tie-up. Musk then proceeded to effectively laud the benefits of a potential union, citing the many collaborations, and “more and more overlap…on so many fronts.” Musk noted the Digital Optimus “human office worker” project, a SpaceX-Tesla JV, is powered by the Grok AI chatbot developed by the rocket enterprise’s xAI unit, and that mobile and internet services provided by the SpaceX’s Starlink satellite network “getting integrated into all our car vehicles.”

Musk’s new comments suggest that a SpaceX-Tesla merger is a strong possibility. So it’s worth considering how much more financially stressful a deal looks today, especially for SpaceX shareholders, than just a few weeks ago. Following SpaceX’s widely-heralded IPO on June 12, its stock jumped from the offer price of $135 to peak at $211 on July 16. At that point, it boasted a valuation of $2.8 trillion. Analysts at the 15 firms that participated in the underwriting, among them Goldman Sachs, Morgan Stanley and J.P. Morgan, predicted that the bump was durable, and on average, posited that the share price would stand at around $225 in 12 to 18 months.

At that point, it appeared that Musk could capitalize on a high-flying stock, poised to soar higher, as a “cheap” currency for buying Tesla. Here’s how the numbers stood: As of mid-July, SpaceX’s valuation was $2.8 trillion vs Tesla at $1.6 trillion. By paying in stock, if news of the deal didn’t move their prices, SpaceX could buy Tesla by issuing an additional 57% of its shares (the ratio of $1.6 to $2.8 trillion). Great case of deploying what looked like an overvalued stock to capture a highly valuable property, by Musk’s estimation at least, while still allowing your existing shareholders to keep an almost two-thirds stake.

Since then, however, both stocks have dropped sharply, substantially changing the calculus. As of mid-afternoon on July 24, Tesla had cratered from $405 to $308, a retreat of 24%. But SpaceX took a much bigger tumble, falling from $211 to $113, or 46%. Now, SpaceX at a market cap of $1.49 trillion would need to issue 82% of its shares to buy Tesla at $1.22 trillion (the ratio of $1.22 to $1.49 tn.). Instead of owning nearly two-thirds of the combo, SpaceX investors would hold only 55%. They’d suffer gigantic dilution of 45%.

So in matter of weeks, a deal should have gotten far less attractive to SpaceX. What may be Musk’s ultimate vision faces a math problem. At their current valuations, SpaceX would be hugely overpaying for Tesla. Issuing all that stock would likely trash SpaceX shares on the AOL-Time Warner model. SpaceX investors would own a little over half of the rocket and AI properties they hold 100% of now, and get only puny additional earnings and big time negative free cash flow, in exchange. Tesla owners might not profit either. Unless they sold right away, they’d be stuck with SpaceX shares falling under the weight of that massive dilution.

Sounds like a bad deal for all sides. But you’d never know it based on Musk’s cheery comments on the call. Take it from Elon. Even the most terrible of terrible-sounding numbers shouldn’t take your eyes off the glorious, gauzy horizon this great salesman’s so skilled at painting.