By Nigam Arora
Editors Note: This was published in ZYX Buy yesterday for paying members.
The biggest opportunity in TSLA and SPCX may come when merger setbacks cause sharp dips, but knowing when to buy will be critical. Get our buy signals, buy zones, and guidance on when to act with a 30 day free trial of ZYX Buy.
Elon Musk has indicated that he is exploring SpaceX (SPCX) buying Tesla (TSLA). Both SPCX and TSLA have set up special committees to explore the merger. To date, 228 Arora Portfolio companies have been bought out or merged, producing huge profits for long time members who focus on buyouts.
Investors fall into three categories: those who own neither TSLA nor SPCX and want to buy, those who own one of the two stocks, and those who own both.
As members know, The Arora Report has positions in both TSLA and SPCX. Both positions are nicely profitable.
The potential merger offers a big opportunity, but there are also risks that investors may be overlooking. This is not going to be an easy merger.
Key Points
- The merger is far from certain.
- Both companies have formed special committees to explore a merger.
- Musk himself has cautioned that a merger is not certain.
- There are major hurdles involving valuation, shareholder interests, corporate governance, and regulatory approvals.
- China could be the biggest obstacle.
- TSLA has major manufacturing operations and significant sales in China. On the other hand, SPCX is deeply involved in U.S. defense and national security.
- Depending on the structure of the deal and applicable regulations, Chinese approval may be required.
- China could use its leverage to demand concessions. A key question is whether China would be comfortable with TSLA becoming part of a company so closely tied to the U.S. military.
- There is another China problem investors may be overlooking.
- To satisfy both U.S. and Chinese authorities, the combined company may have to keep certain technologies, information, and operations separate.
- The irony is that such restrictions could reduce the very synergies that make the merger attractive.
- Consider what happens if tensions over Taiwan escalate. TSLA’s China operations and SpaceX’s importance to U.S. defense could create a serious conflict.
- The technological opportunities are substantial.
- Both companies have expertise in AI, semiconductors, robotics, energy storage, and infrastructure.
- Bringing these capabilities together could create significant long-term opportunities.
- However, the two companies can also cooperate without merging. Investors need to ask how much additional value a merger would actually create.
- The financial risks should not be underestimated.
- SpaceX expects to spend $35 billion to $40 billion on capital expenditures in the fourth quarter alone.
- A merger could improve financial flexibility, but it could also expose TSLA shareholders to SpaceX’s enormous capital requirements.
- The price at which the two companies merge will be critical. A great company can still be a bad investment if investors pay too much.
- Musk has interests on both sides of the deal. What is good for Musk is not necessarily equally good for shareholders of both companies.
The Arora Report Analysis
In The Arora Report analysis, there is considerable long term potential in both TSLA and SpaceX, whether or not the merger happens.
There are real advantages to bringing these companies together, but investors should not confuse technological opportunities with the practical difficulties of completing a merger.
It may be easier to combine their technologies than to combine the companies.
The merger process could be long and complicated. Regulatory hurdles, demands for concessions, disagreements over valuation, and other setbacks could create significant volatility in both stocks.
For investors who understand the long term potential, temporary setbacks may turn out to be buying opportunities.
The key is not to chase stocks on merger excitement but to take advantage of attractive prices when opportunities arise.
The Plan
The plan is to patiently wait for TSLA and SPCX stocks to get hit as the merger faces regulatory hurdles. When TSLA or SPCX stock experiences a significant dip, the plan is to issue buy signals. The signals will be to initiate positions for those who do not own TSLA or SPCX. For those who own TSLA and SPCX, the signals may be for trade around positions. A trade around position is a technique used by billionaires and hedge funds that can dramatically increase your profits and reduce your risk.
To learn more about trade around positions, please see The Arora Report Trade Management Guidelines.
Buy Zones And What To Do Now
Click here to start a 30 day free trial to see the Arora buy zones and what to do now.
This post was published on Wednesday, October 22nd, in ZYX Buy Change Alert.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
