Why Do SolarCity and Tesla Move Together?
Tesla and SolarCity are not joined at the hip. They operate in different fields. Tesla makes electric vehicles while SolarCity installs solar panels and finances them. Events that affect Tesla such as changes in battery prices or oil prices will not change the bottom line for SolarCity. Factors that affect SolarCity such as lower PV module prices will not benefit Tesla. Elon Musk is both the CEO and chairman of Tesla but is only chairman of SolarCity. Despite this, the two companies' stock prices are highly correlated.
The Midas effect
There is a perception in the marketplace that Elon Musk is a modern-day Midas: Everything he touches turns to gold. Very few people can revolutionize one field, but Elon Musk has the opportunity to revolutionize four. Musk changed Internet payments forever with Paypal. With SpaceX, Tesla, and SolarCity, he has the opportunity to revolutionize space travel, transportation, and the power grid respectively.
If Elon Musk is successful with Tesla, investors will assume that the other companies he touches will succeed as well.
Because investors believe in Elon Musk, they are willing to finance SolarCity at a low cost of capital. That low cost of capital is an essential ingredient for an early stage finance company and allows the SolarCity to grow at a great pace. The opposite is also true. If Tesla falls, Elon Musk may not seem like a genius anymore; the enthusiasm for SolarCity could then degrade. Lower investor enthusiasm would mean a higher cost of capital and lower growth rate for SolarCity.
The major investors in SolarCity and Tesla likely overlap
The investors for both companies overlap. If a major investor receives margin calls for one, he will likely have to sell the other. If the stock price goes up for one, there is likely more capital to grow for the other.
Elon Musk is the best example of this. Elon Musk owns around 28% for both SolarCity and Tesla. He has also borrowed around $275 million from Goldman Sachs, in part to maintain his percentage stake in Tesla.
If Tesla stock does well, Elon Musk may continue to participate in SolarCity secondary offerings like the one in October . If Tesla's stock goes down significantly, however, Elon Musk may have to sell some of his SolarCity stake.
The Musk ecosystem
In addition to SolarCity providing solar panels for Tesla charging stations, there is synergy between SolarCity and Tesla in that each provides free advertising for the other.
Just like how people who buy iPhones are more likely to buy iPads and Macs, people who own Tesla cars are much more likely to use SolarCity solar panels than competitor panels. The inverse is also true. People who use SolarCity panels are more likely to consider Tesla cars (if they can afford it).
The free marketing is a competitive advantage for both. If one company succeeds, the other company will see more free advertising and greater growth rates.
The bottom line
All of this being said, if Tesla succeeds, SolarCity is not guaranteed to succeed. SolarCity's chances at success will just be much better. I believe that there is room for both SunPower and SolarCity in the distributed power market. Both have competitive advantages and access to the necessary capital. With the end market being so large, the market is big enough for both companies.
Correlations increase when markets crash. If Tesla's stock crashes, SolarCity trades lower. If Tesla trends higher, SolarCity will follow suit up to a point. However, this correlation between the two companies might be subject to change soon -- but that's another article.
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The article Why Do SolarCity and Tesla Move Together? originally appeared on Fool.com.Jay Yao has no position in any stocks mentioned. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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