After a 30% drop in less than a month, it’s fair to say that Wall Street is very divided Tesla Inc. NASDAQ: TSLA than in previous years. The company’s latest earnings report, released last week, brought a dramatic split between record headline revenue and a sharp decline in profits, and the market has been trying to make sense of it in the days since.
Out of that confusion, two very different visions of Tesla’s future have emerged. Another field sees a core business whose margins are collapsing under the weight of massive artificial intelligence spending, and heading for an exit.
One could look beyond the quarter and look toward a possible merger with it SpaceX NASDAQ: SPCX that can change the whole company.
Which of these two trends a stock follows may be more important than any one line on an earnings report.
Method #1: Core Business Under Severe Stress
The bearish case is based on what the numbers actually showed. Yes, headline revenue grew significantly year-over-year, but operating margin fell more than 60% from a year earlier while free cash flow was negative. Earnings per share missed expectations as capital spending increased.
Dig beneath the headline numbers, and the picture looks solid. The bulk of Tesla’s reported revenue came from a single profit in the SpaceX stake rather than selling cars or energy storage. Take that out, and regulatory credit revenue is fading, and the underlying profit is shrinking significantly. For a company that is still considered one of the most expensive stocks on the market, that’s an uncomfortable place to be.
More worryingly, spending shows no sign of slowing down. Tesla’s capital spending plans have reached massive levels, funding everything from Optimus robots and Cybercabs to new factories and new AI systems. None of this has a clear imminent path to profitability, however, which makes Tesla, in the eyes of the bears, a stand-alone stock.
Method #2: SpaceX Card
Bulls are focused on something else entirely. On the earnings call, CEO Elon Musk acknowledged the growing relationship between Tesla and SpaceX, especially regarding their shared ambitions. However, he was careful not to confirm any legal merger talks.
Given that there had been much talk of a possible merger, his comments were enough to send speculation into overdrive, with Gene Munster of Deepwater Asset Management raising the odds of an eventual merger to 90%.
The vision behind the deal is undoubtedly ambitious. Proponents describe an enterprise that would combine SpaceX’s satellite communications, Tesla’s real-world AI, and orbital computing into one vertically integrated AI ecosystem.
RBC Capital Markets analyst Tom Narayan has gone so far as to model the terms of the deals, arguing that the combination of $480 per Tesla share, a premium of more than 60% to the current price, would leave existing shareholders owning more than half of the combined multibillion-dollar business.
If that vision comes to pass, then the margin questions hanging over Tesla’s auto business today will end up looking like a footnote.
Why the Integration Thesis Is Still Weak
There is an important catch, however. Rather than a strong backstop, SpaceX’s valuation has been steady. Its shares are down nearly 40 percent from their June high, as its pre-IPO hype evaporates and the company suffers from the same AI capitalization fears that have plagued tech stocks.
There’s also the simple fact that a future merger will bring together two more capital-hungry businesses than pairing a cash generator with a growth project. SpaceX may boast stronger margins than Tesla in places, but it remains highly unprofitable and burning through cash in its capital investment cycle. Rather than being a solution to Tesla’s problems, it could be a poisoned vessel.
What Way Is Tesla On?
Based on the stock’s recent price action at least, it’s hard not to add that Tesla’s near-term approach is firmly part of the first camp. Dramatic margin compression, negative free cash flow, and massive spending plans are already reported facts, sitting in black and white in the latest earnings report.
The SpaceX merger, by contrast, remains speculative, with no official process announced and Musk’s comments carefully guarded. For now, the SpaceX game should be best treated as a potential trigger placed on top of Tesla’s comeback story that hasn’t happened yet.
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