Analysis: Musk willing to risk Tesla's future for distributed solar

Amid the noise and speculation surrounding Tesla Motors’ surprising offer to buy SolarCity, one thing stands out clearly: Elon Musk’s faith in the future of distributed solar.

A faith so strong, apparently, that he is willing to risk the future of Tesla for it.

Opinions varied widely on the proposed deal after it was announced after trading closed Tuesday, with Tesla shares falling more than 10% on Wednesday, erasing several billion dollars from its valuation, and SolarCity shares rising more than 3%.

Many Tesla shareholders believe the company would be better served by focusing all its resources on its immediate tasks at hand, including ramping up production of its mass-market model Model 3.

Some SolarCity shareholders, meanwhile, believe Tesla's all-stock offer comes at a low point for the company, and undervalues its long-term potential.

SolarCity grabbed the attention of the global renewables industry with its initial public offering in 2012, and its roaring success in convincing homeowners to put solar panels on their roofs has been one of the main reasons behind talk of the utility “death spiral” in the US in recent years.

Today, California-based SolarCity is the country’s dominant installer of rooftop PV for both residential and commercial customers, and the industry’s single largest employer. The 870MW of capacity it installed last year – representing 73% year-on-year growth – accounted for 12% of the PV capacity put up across the entire country.

Still, the company remains loss-making, and many investors have grown wary of its promises of future profitability.

Since peaking above $80 two years ago, SolarCity’s shares have been battered by an ever-growing list of concerns – from regulatory setbacks for rooftop PV in places like Nevada, to the flame-out of SunEdison, to weak natural gas prices, to SolarCity’s inability to meet its own targets.

SolarCity shares closed around $21 on Tuesday before Tesla’s offer was announced, and there was no obvious catalyst on the horizon to turn things around.

If nothing else, Tesla’s offer – equivalent to $26.50-$28.50 per SolarCity share – may put something of a floor beneath the company’s stock price for the time being. That could buy chief executive Lyndon Rive – Musk’s younger cousin – much-needed time to pivot SolarCity from its previous focus on breakneck growth to one of stable positive cash flows.

In discussing the offer, Musk confirmed that SolarCity expects to post positive cash flow within the next six months.

For SolarCity, the longer term benefits of being part of Tesla and its growing product ecosystem are not difficult to imagine.

One of the biggest challenges for the company – and the entire rooftop solar industry – is keeping its customer-acquisition costs low enough to turn a profit. Musk believes the potential for cross-selling between Tesla and SolarCity is significant.

"Because of the shared ideals of the companies and our customers, those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar, and the reverse is true as well," Tesla wrote in a letter explaining its offer.

SolarCity’s financial engineering methods may be complex, but its core offering to customers is not: It installs solar systems for little or no upfront cost and then sells the power generated at very competitive rates, typically less than what the customer’s utility charges.

It’s not hard to see that such an offer could be compelling to someone set to drive home in a new electric car.

Being part of the much-larger Tesla would improve SolarCity’s access to low-cost capital, which would be helpful both for its core rooftop business and its recently launched – and under-reported – push into utility-scale solar and storage.

SolarCity may also be able to piggyback off Tesla into foreign markets. And the manufacturing expertise Tesla has gleaned at its “gigafactory” under construction in Nevada could surely be put to use at SolarCity’s own 1GW module factory in the works in New York.

The benefits of the deal are less obvious for Tesla. Some analysts were quick to slam an apparent lack of synergies between Tesla and SolarCity. Yet that seems unfair: There are already a few obvious areas of overlap between the two companies, and more are on their way.

It’s worth remembering the high-profile launch Tesla gave its Powerwall and Powerpack energy storage systems last year, and Musk remains adamant that stationary storage will be a major business for the company going forward.

SolarCity is already installing Tesla’s battery packs for its customers, and the renewables and storage sectors are rapidly becoming intertwined.

Five years ago, the notion that one company could profitably make electric vehicles while also installing and maintaining solar and battery systems would have been fanciful. Maybe it still is today.

But the world will be a very different place five years from now. And few people are as comfortable with a crystal ball in their lap as Elon Musk.