Billionaire and entrepreneur Elon Musk has accomplished more by the age of 43 than most people would ever dream to achieve in a lifetime. Today, he has a long list of labels that follow him around, including co-founder of PayPal, CEO of both electric-car maker Tesla Motors (TSLA 11.79%) and rocket and spacecraft company SpaceX, and chairman of solar energy system company SolarCity (SCTY.DL). Some of his current goals include sparking an electric-vehicle revolution, enabling multi-planetary life, bringing the Internet to all parts of the world, and replacing high-speed trains with a pod-shooting tube called the Hyperloop.
Clearly, this dude is one smart cat. Heck, he dropped out of a Stanford Ph.D. program for high-energy physics after two days, when he realized the program seemed to be limiting his ambition. Shortly afterward, he sold the first company he founded, Zip2, to Compaq, and netted $22 million for himself -- the beginning of a fortune that would balloon to an estimated net worth of $12 billion today.
Image source: Tesla.
With this sort of track record, some investors might be interested in the companies Musk is running just because he is running them. Fortunately, two of them are publicly traded: Tesla Motors and SolarCity. While his involvement at Tesla as CEO is much greater than his time spent at SolarCity as chairman, both companies are core to the future he imagines: electric vehicles everywhere and a proliferation of affordable solar panels paired with stationary energy storage, or batteries storing energy.
This raises the question: If you were to invest in one of Musk's two publicly traded businesses, which would you choose? Here, two of our analysts discuss the case for each stock.
The case for Tesla
Daniel Sparks: While Tesla's revenue today primarily comes from sales of electric vehicles, the company is strategically positioned to also benefit from the fast-growing residential solar market. Indeed, Musk said in Tesla's most recent quarterly conference call that the company plans to unveil its Tesla home battery, to be paired with solar panels, soon.
"We have the design done and it should start going into production probably in about six months or so," Musk said.
Best of all, if the wild success of Tesla's Model S is any indication of how its planned Model 3 (a model planned to cost half the price of its Model S and scheduled to launch in 2017) will perform in the market, Tesla might not even need the energy storage market to continue to grow revenue at rates around 50% annually for years. Energy storage could simply end up being the icing on the cake.
The case for SolarCity
Travis Hoium: Electric cars are reinventing the way we think about vehicles, and solar energy is revolutionizing the way we think about energy. At the heart of that is SolarCity, which is turning average electricity consumers into electricity suppliers, turning a century-old electric industry on its head.
What SolarCity has done is build the infrastructure and financing to make "going solar" possible and affordable for millions of Americans. By mid-2018, the company hopes to have 1 million customers, and that's still just scratching the surface of its potential. Falling costs should open up even more of the 132 million homes in the U.S. to the option of solar power, and SolarCity's commercial business is booming as well.
Making solar energy affordable is at the core of SolarCity's success. Solar leases or power purchase agreements provide $0-down financing and lower costs than utility electricity, but from SolarCity's side of the equation, the key is cutting costs on each installation. On that front, costs have come down 40% since 2012 (yes, just two years ago) and continue to fall each quarter.
On top of falling costs is improving technology, which Daniel alluded to above. Tesla's batteries are ending up in more and more solar installations, and before long that will give consumers complete control over their electricity production and usage.
For my money, I would bet Musk can upend a stodgy electricity business with little interest in innovation before it can beat out the behemoths who control the auto industry.
Daniel's response:
However, the success of SolarCity is highly anchored to the fast adoption of a new technology that isn't certain to catch on as fast as the company hopes. Of course, this dependence on new technology to disrupt the old is an argument against both SolarCity and Tesla, but it could be argued that the market has priced in more growth for SolarCity than for Tesla. Both companies have a similar gross profit margin, yet SolarCity's price-to-sales ratio of 19 is more than twice Tesla's ratio of nine.
Furthermore, it could be argued that Tesla has a larger lead on its competitors considering the Model S still remains the only fully electric vehicle with up to 270 miles of range, and its Gigafactory, purposed to build enough battery packs to bring 200-plus-mile range in much larger numbers with the Model 3, is scheduled to be finished next year.
Travis' response:
We could argue all day about whether Tesla or SolarCity is more highly valued and how traditional metrics don't capture the real value of these companies (SolarCity's sales aren't a great comparison because they sign customers to contracts of 20 years). To me, this debate comes down to which industry can Musk fundamentally disrupt profitably.
The problem I have with the auto industry is that it's incredibly high-risk, and success today doesn't necessarily mean success tomorrow (see the boom in SUVs in the early 2000s that eventually bankrupted multiple manufacturers). For example, BMW -- maybe the biggest threat to Tesla -- is finally starting to invest in EVs, and with its much bigger balance sheet and much more engineering firepower, could create an equal or better EV than any of Tesla's models if it so chose. Now that the EV market is being established, we're starting to see these real competitive threats finally emerge from the shadows.
While competitors are working on their answers to Tesla, Musk will be spending literally tens of billions of dollars building out manufacturing capacity (which he's never done before) in hopes that Tesla will still be a dominant player in a growing EV market in a decade. Assuming that major automakers the world over won't get their act together by then and that Tesla will be able to make a reasonable return on that investment seems a huge risk to me.
In the solar industry, SolarCity not only has a chance to create a sales and installation infrastructure that few rivals will be able to match, but with investments like the Silevo solar panel manufacturing acquisition, it could actually make technology that's fundamentally better than most competitors' (Tesla's technology is essentially a commodity). At the end of the day, I think residential solar is an industry that will be easier to disrupt and will come with less competitive threat because the market is so big -- but I'll be honest and say that I think they're both extremely high-risk.
Is Elon Musk really worth all that money?
There's no question that Elon Musk has built an incredible amount of wealth upending industries that most people think are immovable. But what he hasn't done is prove his ability to build a profitable long-term business, which leaves us arguing about future growth projections and comparing valuation based on metrics like price-to-sales and not profitability.
All investors in Musk's businesses should keep this in mind: Elon Musk has never run a major profitable company. Not even PayPal was profitable before eBay bought it, and Tesla Motors and SolarCity certainly aren't making a profit today or anytime in the near future.
At the end of the day, we have our picks on which Elon Musk stock is best, but we have similar questions about whether either company is worth the price investors have to pay for them. Ultimately, that may be the biggest question facing investors, and it's a debate that will rage on for many years to come.
