Will Elon Musk’s Tesla-SolarCity Gamble Pay Off?

“Wall Street hates,” said CNN Money. “Fraught with danger,” scolded Computerworld. Those headlines were the typical reaction when Elon Musk -- or, technically, Tesla’s board of directors -- made an offer last month to purchase all the outstanding shares of SolarCity’s stock for an estimated $2.5 billion.

Considering that Musk is co-founder and CEO of Tesla and is also chair of the SolarCity board, it is obvious this merger is solely his brainchild, an assumption Musk is hardly trying to disprove.

On paper, this is a merger that is easy for Wall Street analysts and business school students to pick apart. And not just because of what appears to be the blatant conflict of interest on Musk’s behalf. SolarCity’s position as the largest solar installer in the U.S. has not yet prevented the company from stanching its financial losses. Furthermore, missed projections have contributed to the company’s stock to trade at a current price at less than half of the $57 per share price it had reached late last year.

Meanwhile, Tesla has taken its share of lumps, too. The electric automaker’s stock had been on an upward trajectory earlier this year, but has since been in a slump, and problems from selling less cars than expected (despite overall rising sales figures) to the optics problem resulting from a driver losing his life in an autonomous car driving test have contributed to shareholders’ unease.

Nevertheless, the merger makes sense for a lot of reasons, and not just because of Musk’s pie-in-the-sky vision of a post-carbon society. The reality is, Musk’s pie is closer to earth than many analysts currently realize. Both companies have plenty of what the business world likes to call “synergies,” and not just because Musk has his hands all over both companies. Both SolarCity and Tesla share an integrated business model, in which the firms own the means of production, from the solar panels of SolarCity to the various parts that comprise a Tesla car.

Hence, the combined Tesla-SolarCity entity can benefit from both organizations’ greatest strengths. If Tesla ever becomes profitable, it most likely will not be because of the much-anticipated affordable Model 3. In fact, it could be because more Tesla’s batteries could end up serving as energy storage units for homes than being plunked into its cars, a point Musk made at the company’s most recent shareholders’ meeting.

And those batteries could be sold with a residential or commercial solar installation, a proposition that only a “Tesla Solar” or “Tesla Power” could pull off. The current state of affairs for the residential solar industry is that it largely lacks street cred with consumers, many of whom view this companies with contempt for their hyper-aggressive telemarketing and sales tactics. When one goes to a city’s summer street festival and sees more solar hucksters than corn dog vendors, the gut reaction is usually contempt and distrust—especially upon the return home only to hear the phone ringing due to yet another solar salesperson. The stubborn fact is that the industry suffers from this disarray because there is no strong player in the industry—and SunEdison, the one company that had some heft, is currently in bankruptcy protection.

But the Tesla brand carries not only a strong reputation, but it is backed up by a strong portfolio of products—and that includes the company’s energy storage systems, which will only improve in performance and drop in price as the company continues to scale their production.

Furthermore, in an era where more consumers are getting tired of funding utilities’ nineteenth-century business models, a one-two punch of a solar installation and a battery that can store that energy for after sunset could be a winner with homeowners and businesses. Tom Randall of Bloomberg insists that Tesla wants to be the “Apple Store” for electricity; Tim Fernholz of Quartz says this move is all about net metering, the fledgling practice of utilities purchasing excess solar power when such systems are generating excess electricity.

Motives and long term strategies aside, the truth is that even if politicians and regulators keep siding with utilities, solar power and energy storage keep getting cheaper. In a few years, the purchase of such a system will make even more financial sense and become far more affordable. The results will be the continued clean energy revolution in how we power our homes and offices in addition to changing how we fuel our transportation; and yes, and even more smug Elon Musk, which will drive even more of his critics insane—while they purchase these power systems, along with the rest of us, later this decade.

Image credit: Steve Jurvetson/Flickr