I’d buy Tesla shares if this happened

Jay Yao writes why he’d buy and hold Tesla shares if Elon Musk were to merge all of his companies including SpaceX under Tesla.

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Earlier, I wrote about how Tesla (NASDAQ: TSLA) shares have fallen more than 20% since early this year. While shares traded for around $880 in early January, they trade for around $600 now. Given the current price decline, here’s what I’d do.

Tesla: substantial momentum

As it stands currently, I reckon Tesla has considerable fundamental momentum. With the anticipated growth in electric vehicle (EV) demand, Tesla has a large and growing market to sell to. Given Tesla has spent a lot of time and resources developing autonomous driving software, Tesla has a potential opportunity in that sector as well.

Many believe robotaxis will become market ready in some areas of the world within a few years, and Elon Musk seems to be confident that Tesla could be one of the leaders. With the company’s current market cap, Elon Musk also has the resources to potentially buy artificial intelligence talent or autonomous driving companies willing to sell for equity if Tesla’s internal efforts run into hurdles.

Risks

While Tesla is the leader in EVs right now, it will have competition. Other companies like Volkswagen and GM are planning to go all electric in the future and the market for robotaxis may not be winner-take-all. As Elon Musk put it in a tweet, “When vast amounts of manufacturing are needed, as in robotaxis, this slows down rate of introduction, so maybe more like winner-takes-a-quarter. Still great”.

Tesla also has a very optimistic valuation. Elon Musk himself said that the stock was too high around May of last year when Tesla share price was considerably lower.

SpaceX and the future

Given Tesla’s high valuation and the competition, I wouldn’t buy at the current Tesla share price except under one condition: that’s if Elon Musk merged Tesla with all his other companies, including SpaceX.

In terms of Elon Musk’s other companies, none is larger than SpaceX, which makes potentially cost effective rockets that launch things into space. Recently the private market valued SpaceX at around $74bn, or about 13.5% of Tesla’s current market cap. 

If Tesla bought SpaceX and Elon Musk’s other companies, I believe the combination could be a long-term winner. SpaceX would have the financial resources of Tesla and Tesla shareholders would get the future potential for SpaceX. The combination could be something that would instantly differentiate Tesla from every single other car company. Although GM and Volkswagen might be bigger in terms of total vehicle production, they don’t make reusable rockets. To me GM and Volkswagen wouldn’t have the same type of potential as SpaceX as whoever wins market share in space early will have a head start in a basically limitless market. I reckon investing in that potential combination would be socially responsible as well. 

Given all the potential SpaceX has in the long term, I think the combination of the two largest Elon Musk companies would be something that would cause me to buy Tesla shares if they trade for the current Tesla share price of around $600 or lower. Whether Elon Musk decides to merge his companies is up to him, however. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jay Yao has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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