SpaceX Spent $19.6 Billion in One Quarter. An All-Stock Merger Would Hand Tesla Owners Part of the Bill. Here's the Conglomerate I'd Own.
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| By Al Qureiyeh |
If you've been tempted to buy Tesla on the talk of a SpaceX merger, you have plenty of company.
On Oct. 20, Elon Musk said the boards of Tesla (TSLA) and SpaceX (SPCX) had each set up a committee of independent directors to discuss combining the two. Together, the companies are worth more than $3.5 trillion.
Tesla rose about 3% the next day, more than twice the gain in the Nasdaq Composite, an index of most stocks on the Nasdaq exchange. Yet there are no terms, no merger filing with the SEC and no vote on Tesla's calendar.
A merger isn't good or bad by itself. What matters is who pays and who decides. On both counts, the deal so far asks more of Tesla owners than it shows them, so I'd own the conglomerate, a company made of many businesses, that gets both right.
What Happened
SpaceX's third-quarter sales rose 161% from a year earlier. Most of the gain came from its artificial intelligence (AI) business, partly because SpaceX bought xAI, another Musk company, in February.
On the same call, Musk said a merger would be "a good idea," but that as "a conflicted party" he can't take part in the talks. Investors took the news well. Tesla's gain came after both the merger talk and SpaceX's strong results, so the two can't be separated.
Then Tesla reported on Wednesday night. Sales were flat and profit fell. On the call, its finance chief cut this year's spending plan, and the stock opened lower on Thursday.
On my scorecard, if you bought Berkshire Hathaway (BRK.B) on my Oct. 20 report, you're slightly ahead of the S&P 500, an index of 500 of the largest U.S. companies, since the close I quoted. If you avoided CoreWeave (CRWV) when I said to on Oct. 13, you sidestepped a fall of more than a fifth.
We're behind on Monday's switch from the Direxion Daily Semiconductor Bull 3X Shares (SOXL), built to triple each day's move in chip stocks, to the VanEck Semiconductor ETF (SMH), because the 3x fund kept rising faster.
Why the Merger Fans Are Half Right
Barclays analyst Dan Levy says a combination "has increasingly become the consensus expectation."
The fans have a point. First, SpaceX is growing far faster than Tesla. Second, both boards set up independent committees, which Tesla's board did not do when it bought SolarCity, another Musk company, in 2016.
Researchers have long argued the other side: companies built from unrelated businesses tend to be worth less than their parts. A widely cited study found the average diversified company lost about 15% of the value its businesses would have had on their own.
General Electric has since split into three companies: GE Aerospace (GE), GE Vernova (GEV) and GE HealthCare (GEHC).
Where I part ways with both camps is the cause. The record on breakups is mixed: an S&P Global study found that parent companies did no better than the market in the three years after a spin-off. In my view, what matters is who controls the money, not how many businesses one company owns.
Weiss Rates Berkshire a BUY, Tesla a HOLD and SpaceX a SELL
Weiss rates Berkshire Hathaway, itself a conglomerate, "B+," a BUY. GE Aerospace, the company left after General Electric's breakup, is "B," also a BUY. High oil prices, which weigh on its airline customers, keep it off my list today.
Weiss rates Tesla "C-," a HOLD, with a Risk grade of "D," Weak, a sign the stock has been risky to own. Weiss rates SpaceX lower, "D," a SELL.
No Weiss Ratings Daily piece this week covered the merger.
Avoid buying Tesla for the merger. Avoid SpaceX, "D," a SELL.
Who Pays and Who Decides
Start with who pays. In the third quarter, SpaceX spent $19.6 billion on equipment, mostly for AI, more than twice the cash its businesses brought in before interest and taxes. It plans to spend at least $35 billion in the fourth quarter.
Tesla, by comparison, had about $1.5 billion left in the quarter after its own spending. If the two combine through a swap of shares, Tesla owners would share SpaceX's bill.
Now, who decides. Musk controls about 82% of SpaceX's votes and owns about a fifth of Tesla. He sits on both sides, which is why the committees exist.
This "B+" BUY Is the Conglomerate That Works
Add to Berkshire Hathaway (BRK.B) at the next close; the stock closed Wednesday at $539.
Berkshire owns insurers, a railroad and utilities. Its managers run their businesses and send the extra cash to headquarters, where the chief executive decides where it goes.
Its Owner's Manual says Berkshire will issue stock "only when we receive as much in business value as we give." That's the test an all-stock Tesla deal would have to pass.
Weiss rates it "B+," a BUY, a notch below the "A-" it carried when I first wrote about it.
In each of the six big sell-offs I checked, going back to 2007, Berkshire fell less than the S&P 500.
Wednesday's close was about $4 to $9 below the average Wall Street target at MarketBeat and StockAnalysis, as of Oct. 22. That's a potential gain of less than 2%, so you buy Berkshire for how it holds up, not for a quick gain.
It pays no dividend and buys back its own shares instead. Give it a year, with the first check at its third-quarter report in early November.
What could work against it: Berkshire lagged the S&P 500 in five of the six rebounds that followed. And if Tesla owners are offered a rich price in a merger, they'd likely do better in the short run.
Berkshire is the kind of idea my process surfaces. If you want ideas checked against a stricter, fundamentals-first test and tracked for you, that's what my AI Profit Accelerator does.
The Takeaway
What happened: Musk's two companies are discussing a merger, and Tesla rose on the talk and on SpaceX's strong results, though there are no terms.
What it means: A combination helps owners only when the money is spent with discipline and no insider sits on both sides of the deal, and this one has shown neither yet.
What to do today: Add to Berkshire Hathaway (BRK.B) at the next close; the stock closed Wednesday at $539.
Avoid buying Tesla (TSLA) for the merger.
Avoid SpaceX (SPCX), "D," a SELL.
What We're Watching
First, the terms. If the committees offer Tesla owners a premium and a vote that leaves out Musk's shares, I'll revisit Tesla, and I'll say so.
Second, SpaceX's spending. If its fourth-quarter spending runs above its plan, I'd keep avoiding Tesla even if a deal comes, and I'll say so.
Third, Berkshire's third-quarter report. If profit from its businesses falls from a year earlier, I would sell, and I will say so.
Take care,
AL Qureiyeh
