How Tesla's Bid for SolarCity Disrupts the Industry -- and the Carmaker's Future

Should a car company own a solar business? Having a drone follow you while surfing sounds pretty cool, but there are so many more things they can do, so when do we see their full potential? And yes, hotdogs are the all-American favorite this weekend.

In this episode of MarketFoolery, Chris Hill, Simon Erickson, and Aaron Bush take a look at today's biggest headlines in the market. Listen in to find out what's wrong with the buyout that Tesla Motors (TSLA 4.96%) has proposed for SolarCity (SCTY.DL), how the new FAA regulations on commercial drones will affect the consumer-goods space, and how you can land yourself a free pack of Ball Park Franks from Tyson Foods (TSN -0.70%) for this Fourth of July weekend.

Also, the hosts take a dip into the mailbag to answer a listener question about why -- when The Motley Fool strongly discourages attempts to time the market -- we have watch lists and attractive stock price points on our services.

A full transcript follows the video.

This podcast was recorded on June 22, 2016. 

Chris Hill: Simon Erickson's back in the room. He was here yesterday. He's back in the room today because he's a SolarCity guy, and that is, as they say in the music industry, Topic A.

Simon Erickson: That's right.

Hill: Topic A is the fact that the News Fairy showed up with Tesla Motors offering to buy SolarCity for the tidy sum of $2.8 billion in stock. There are a bunch of threads I want to pull here, but Simon, what did you think when you first saw the news?

Erickson: I was not happy with the News Fairy's news. She did not leave a good present, I don't believe, with this deal, because, from a SolarCity perspective, which we do have as a recommendation in several of our services, I think it's a really lowball offer. I think this is undervaluing the significant potential that SolarCity has for equity holders over the longer term. So yes, it is an all-stock deal. You do get to maintain the upside of shares of Tesla going forward. But I personally think the offer price is a little too low.

Hill: Now is the point, Aaron, where I mention that, since Simon use the word "lowball" to describe the offer, that Elon Musk is the CEO of Tesla Motors and is the chairman of SolarCity. He owns roughly a fifth of both companies.

Aaron Bush: And his cousin is the CEO of SolarCity, as well. So you have a little bit of that going on, too.

Hill: A little bit.

Bush: A little. [laughs]

Hill: Elon Musk has, I would argue, a very good reputation. And I think that is helping him right now, because if he didn't have a very good reputation, this would just look like ... I don't want to say it would look dirty, but it would smack of ...

Bush: Nepotism.

Hill: Yeah, and lining one's own pockets. So, from a Tesla standpoint ... I should mention what the stocks are doing. SolarCity stock is up on this news, Tesla Motors shares were down about 10% overnight. This morning, they bounced back a little bit, but still down about 7%-8%. Aaron, when I look at the media coverage, there aren't a lot of people who are giving a thumbs-up to this deal.

Bush: Yeah. My perspective on this is that it really is mixed. There are pros and cons to this deal. Starting with what I like, I think that bringing SolarCity in-house gives Tesla a pretty obvious benefit for their whole upcoming Tesla Energy business. On one hand, I think this deal makes good sense from a product ecosystem perspective. Tesla owners will get a cost-effective, environmentally friendly, and probably a cool brand-friendly way to charge their cars. And the future of Tesla Energy, so to speak, is probably bound to be something more intriguing because of this deal. And I think that's probably going to be a big business.

The other thing I like about this is more grounded in the numbers. If you listen to Tesla's past earnings call, where Elon Musk was talking about the importance of being the best manufacturer in the world, and the importance of vertical integration, and all of that, it becomes clear that SolarCity fits directly into that. With SolarCity, Tesla will be able to provide both greater scale and manufacturing expertise for SolarCity, which I think is deeply needed, or would just be massively helpful for their costs. And it will accelerate adoption of their total addressable market. So that is the good side I see for Tesla.

I mean, what I dislike --

Hill: Can I take a guess of what's on the list for the downsides?

Bush: Go for it.

Hill: I'm going to guess that somewhere on the list is the distraction element, because Tesla Motors is on the hook for delivering a whole lot of vehicles in the next couple of years. And now, if this deal goes through -- and there's no reason to think that it won't, but we can get to that in a second with Simon -- if this goes through, then all of a sudden, there's a whole other chunk of the business that is distracting Elon Musk and his team from delivering all of those vehicles.

Bush: Yeah. I'm not sure how much mind share or time it will take away from Elon and the current Tesla executives for this. It certainly will take some away. But I think probably the biggest distraction is more financial. SolarCity carries a lot of funding needs. And there's been a whole web of how that's been funded, Tesla being part of that, I think even SpaceX was part of that, too, and other players. I view this just as much as a potential burden on Tesla's financials. They already have a pretty significant sum of debt, but this could distract them financially when they already need to raise money left and right. I think that's a challenge.

Then, SolarCity has changed their strategy a few times over the past couple of years. Probably twice or so. Going into the Tesla fold will probably cause them to change their strategy again, which brings more uncertainty. And I don't really know how that'll play forward. So it is a mixed bag.

Erickson: I'll jump in on the capital requirements for both of these businesses. You've got Tesla trying to build out the Gigafactory right now and scale up for the Model 3 -- huge capital allocation requirement. You've got Tesla building a plant for the in-house manufacturing of their own solar panels -- huge capital requirement. Tesla is diluting its shares to make the acquisition, which is another hotly contested topic for investors, too. I just don't think now is the right time for SolarCity to be acquired. At least for shareholders, it seems like we're at the apex of fear right now. We've seen a lot of political headlines; we know what happened in Nevada, where they had a retroactive decision that was very anti-solar, not solar friendly. I think all of that is baked into an undervalued share price for SolarCity right now. I just don't think now is the time to go out and put yourself up for sale to be acquired by Tesla, who needs some money for their own projects anyway.

Bush: Yeah. And you mentioned how there's a Musk factor -- people respect him so much; therefore, he can get away with things like that. The other key element to all this is just the reflexivity between all of the news games he's playing, all these deals that he's making. This would not be possible if he weren't using shares. Shares are at a pretty lofty price compared to what the business is doing --

Erickson: For Tesla.

Bush: For Tesla. So he's basically keeping the hype going, keeping the news rolling, to keep the shares up so that he can continue to raise money this way, make deals this way. So there's added risk from that as well.

Hill: Simon, when I hear -- and it doesn't even have to be in this deal, but in the past, when I've heard acquisition deals and offers referred to as "lowball," there's a pretty good chance that shareholder lawsuits follow. Do you think that we're going to be seeing that with SolarCity shareholders?

Erickson: I would almost guarantee you'll see those, the lawsuits popping up in the next couple of weeks or so. Tesla is in due diligence right now. We're going to have an upcoming vote on this. But you have to consider purchase price and Elon Musk's affiliation with both parties when you consider those.

Bush: One thing I would briefly add to that is, both Elon Musk and the Rive brothers of SolarCity have agreed to not vote their shares for this. There probably will be lawsuits, because there always are lawsuits, but it's actually more shareholder-friendly with them stepping out and allowing the more third-party shareholders to be voting instead.

Erickson: True. And Chris, if I could just take a moment to explain why I keep calling this a lowball offer. The majority of the value of SolarCity right now is already baked into existing contracts they already have. Residents and businesses sign 20-year contracts to provide power to them at low rates, which SolarCity inks. That's a contractual obligation; it's existing business already. And when you look at the present value of all of those existing contracts, it's about $20 per share today. Really, the high end of Tesla's offer, which is, as of yesterday's price, about $28.50, Tesla is saying all of the growth of this business is worth only about $8.50 per common share of SolarCity today. When you look at, historically, how much value they're adding to shareholders every year, I think that is not capturing the long-term potential of this multitrillion-dollar electric-energy industry in the United States.

Hill: Last question, and then we'll move on. Is there a price that you would feel good about as a SolarCity shareholder? Or do you just look at this and say, "No, I want them to keep giving this a shot and try and go it alone."

Erickson: There's a definite range. I have to recrunch the numbers, because of the Nevada decision -- actually is affecting the business of SolarCity recently. I don't think that affects everything two years out, but in the last six months or so, we have seen fewer bookings, which is affecting the operations of SolarCity, which is how we model a company like this. But I will say this is historically at very low multiples of what typically SolarCity has sold, in terms of a multiple of their value of their current business, and the value of the growth of their business.

Hill: We have some movement on the commercial-drone front. The FAA has released new regulations that will go into effect in late August. Aaron, I was struck by the fact that beyond dictating what these rules are going to be in terms of who gets to fly drones, what's involved in terms of licenses and that sort of thing -- you don't need a pilot's license; you need a drone license, which is apparently a lot easier and a lot cheaper to come by -- the FAA went out of its way to talk about what this will do to the U.S. economy, saying, "We think the commercial-drone industry is going to add 100,000 jobs in the next 10 years; it's going to add $82 billion to the U.S. economy." And yet I get the sense that they're not popping the champagne over at Google and [Amazon.com] (AMZN -1.65%) and Wal-Mart and places that are looking at it.

Bush: Not quite.

Hill: Where are we now, when it comes to commercial drones?

Bush: Previously, there was pretty much a rule on every single thing you could do with a drone. This allows you to operate it with fewer restrictions -- still manually controlling it within line of sight, but it doesn't quite extend to autonomous drones, which is what the Googles and Amazons are most interested in. They deliver packages and go around doing their own thing, and we as humans don't even have to deal with it that much. We're not quite there. But this is a good step in the right direction, because there are plenty of use cases that don't have to be autonomous.

I was looking at the numbers a little bit. As you mentioned -- 100,000 potential jobs. They anticipate up to $80 billion or more in value created in the next decade. But currently, how it's done with getting permission from the government to use drones, there's just a giant backlog of companies requesting permission. The government has to go one by one and look at each one. But now, that's going to go away. There will be thousands of companies across all industries that will have the ability without having to wait anymore to start using this. I think that is the big news here.

Erickson: Especially for investors, because now things get interesting. It's kind of neat having a drone following you around as you're surfing on Hawaii's north shore or whatever you're doing action sports-related. But the real bang for your buck as an investor is going to be, how is a commercial company going to monetize drones into their business? And what does that mean for shareholders? It gets interesting now.

Bush: Yeah, it's a productivity boost.

Erickson: And Chris, I know, you are a surfer on the North Shore of Hawaii, right?

Hill: Not even remotely. That was the look you saw on my face: "What are you talking about?" First of all, I'm not surfing on the North Shore. Secondly, I don't want a robot flying behind me when that's happening. 

[email protected] is our email address. From Dan Schmidt in South Korea: "I've been listening to all of the Motley Fool podcasts for about a year now and learning a lot. One thing I'm still confused on is why your services have things like watch lists or attractive price points for stocks. It seems like a constant theme is that no one can predict or time the market. But isn't waiting for the price of a particular stock to come down just another way of timing the market? Why not just always buy this stock whenever you have the money available, regardless of what the stock is currently trading at?"

Bush: It's a good question.

Hill: It is, Aaron. What do you think?

Bush: I totally agree with the phrase that time in the market is much more important than timing the market. Generally that tends to be true. But, alas, there are no firm rules here, and context is king in pretty much all of this. For example, there are times where valuations get super lofty. We've seen bubbles through history. There's even more hype on a microeconomic basis, looking company by company. From that fact alone, I think it makes sense to at least be price-conscious. And how you approach this also depends on your investing style. There isn't necessarily a right or wrong answer here.

If you want a more concentrated portfolio, it might make sense to wait until you're very certain that a stock will give you good returns, which could be a totally different philosophy from someone who's younger and is more willing to take risks, who wants to own more businesses. They'll be OK just buying a company that has good prospects for a decade on. And only after that, when they're looking at potentially making it a larger percentage of their portfolio, would they start thinking about the price more and more. There's a lot of different way to twist all that.

But I would just say everything is contextual. Thinking about this question through the specific context of your life portfolio and strategy will help you come up with the best answer for yourself.

Erickson: I agree with what Aaron said. What can you model? If you're building a model and you come up with the price target, how sure are you with the inputs that you're putting into that model? And if it's a business like a Starbucks or a Wal-Mart, maybe you can, with a pretty high degree of accuracy, get the inputs correct on a model like that. But if you're putting something like any commerce player, or a tech company, or somebody that's going to sell software, or even social networking -- when Facebook (META -10.56%) first came out, nobody knew how big that was going to be. Something that has the majority of the value of the company in the future that is unknown, you're going to get it wrong. Don't let a price target that's out there for a 12-month forecast convince you to not buy a stock that could have a really really big future.

Hill: I think Dan sounds like one of those people who is at that point in his life where he is taking the approach of "Hey, if I've got some available money, I want to put it to use right away, and I'm not looking to necessarily get the best possible price." But we have seen that in the past with a variety of different companies, and one that comes to mind is Facebook. When you think about where Facebook was trading roughly eight to 12 months after its IPO, it had dropped down. I remember walking around this building talking with analysts, some of whom were looking at it and saying, "This is nuts, that Facebook is trading this low. That's crazy." To me, Aaron, some of the examples that leap to mind the quickest are the ones on the extreme, where a quality company's price has been knocked down on its stock, and you're like, "That's just stupid." And on the flip side, it's -- and I don't mean to pick on them -- but it's Shake Shack trading at $90 a share, where you're like, "Wait a minute. That's insane, that it would be that high." If I were someone who is interested in shorting stocks, that's one that I would short.

Bush: Yeah. Again, I really think it's contextual. It depends on what exactly you're looking at. One thing I would say, though, is, if you're someone who's regularly investing money, that's me, that's a lot of other people, you have a watch list because you can't invest in everything at once, also. So you have it to study it over time, look at it over time, so you can figure out at any given time which one you should go for when you have the money. Call it timing, call it something else; you still have to pick and choose.

Hill: And one thing that you've just alluded to is not directly addressed in Dan's question but is something that I think investors should always keep in mind. That's fees. What are the fees? If you have a system set up where you're not paying high fees, and you can make more frequent purchases, that's great. For a lot of people, there is some sort of transactional fee. It's something you always want to keep in mind.

Bush: Yeah. We normally say the general rule of thumb around here is to keep the fees 2% or less of your trading. I would go a little further to say, you don't have to trade like crazy. You don't need to buy everything. You should at least put some thought into what you're buying, instead of just being like, "Oh, that looks cool, I'm going to buy it, because price doesn't matter." That doesn't really work out for you very well. But every context is different. Having a watch list can still be important, I think.

Hill: Before we get to our final story, I want to welcome, on the other side of the glass with our man Dan Boyd today -- one of our listeners, Mike Stern, is here with his son, Alex. Thank you for coming in to Fool HQ. Tyson Foods in the news, because Tyson Foods is a company behind, well, a lot of meats, one of which is Ball Park Franks. As a promotion leading up to the Fourth of July holiday, Tyson Foods is giving away 10,000 packages of Ball Park Franks.

Bush: This is huge!

Hill: This is huge! There's a little bit of a hitch, though. They're doing it on Twitter to people who are named either Frank or Angus. But for those of us -- I would argue most of us -- who are not named Frank or Angus, I think this is an interesting little wrinkle -- they're going to give it away to people who change their name on Twitter to Frank or Angus for one day. 

Erickson: Beautiful.

Bush: You know what I'm doing right after this. [Laughs]

Hill: Is that what you're going to be doing?

Erickson: Nice to meet you, Frank!

Hill: So there you go. For anyone looking for a free package of Ball Park Franks, just in time for the upcoming Independence Day holiday, which, in their announcement, they included that it is the top holiday for hot dog sales. That makes sense. Doesn't it? I mean, you guys grill, right?

Erickson: All the time. 

Hill: Are you a hot dog guy?

Erickson: Especially when I call myself Chef Frank. Or Chef Angus.

Hill: All right. Frank Erickson, Angus Bush -- thanks for being here, guys.

Erickson: Thanks.

Bush: Thanks.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.