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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Will 2017 Be Musk’s Most Important Year?

It is going to be a busy 2017 for Elon Musk. The serial entrepreneur has made enormous strides with Tesla, SpaceX, and Solar City in recent years, but 2016 has set Musk up for what could be a pivotal year in both the renewable energy and electric vehicle markets.

This year Musk has to manage a tremendous amount of change at Tesla all while keeping SpaceX on the road to recovery after its fueling anomaly led to a pre-flight rocket explosion. SpaceX has competently managed the aftermath of that explosion, but the company still has an important 2017 ahead in terms of restoring customer confidence.

If SpaceX has an important 2017 ahead of it, then the year for Tesla is critical. In 2017 Tesla will (1) launch a new car that aims to be its first mass market vehicle, (2) open an enormous battery factory to supply its business lines, (3) try to perfect its autonomous driving program in the face of increasing competition, and (4) integrate the sizeable acquisition of SolarCity which represents an entirely new industry for the firm.

The Solar City merger may be the biggest headache of all for Musk. Solar City is a leader in its field, but the renewable energy landscape is changing very rapidly, and any disruption to the SCTY business due to the merger could cost Tesla’s shareholders some of the $2.6 billion they spent in acquiring the firm.

The Tesla merger with Solar City was declared a no-brainer by Musk, but it is unclear if Tesla has the right institutional expertise to effectively operate in the rooftop solar market. So far the omens look good – the new Tesla rooftop solar tiles are a unique and innovative product – but the company still has a tremendous amount of work ahead of it.

Solar City’s business is being increasingly challenged by new competitors, regulatory changes, and potential uncertainty around how its business model will fare in a rising rate environment. As some analysts have noted, “SolarCity was one of the companies that popularized leasing, rather than owning, solar-power systems—the pitch was that, for little to no money down, homeowners could install solar power and pay less per month than their power bills. Paying for those systems, however, meant that the company buried itself in debt that is still on the books, and is now having trouble finding new buyers.” Related: Will Trump Privatize The TVA For $20 Billion?

If Solar City struggles to rollover its existing debt or sell new debt in order to finance new leased systems, it could seriously crimp the business model. In addition, the solar market in recent years has started to move from a system where homeowners primarily lease rooftop systems to one where such systems are sold directly to consumers.

Related: Mexican Drug Cartels Threaten To Blow Up Gas Stations Over Massive Price Hike

GTM research is forecasting that the trend towards ownership rather than leasing will continue thanks to falling solar system prices. Tesla and Solar City could certainly do very well under a sale regime as opposed to a lease regime (and it would help the company avoid debt issuance problems just as interest rates start to rise), but such a regime switch would still be yet another challenge for Tesla to deal with as the company moves through a very busy year.

External factors like the new Presidential Administration could also be a challenge for Tesla and its solar energy related business model. Still given the firm’s focus on domestic manufacturing, the political changes could be end up being either a headwind or a tailwind.

Musk’s challenges have perhaps never been greater than they will be in 2017. Investors will be watching closely to see if the visionary CEO can live up to their expectations and his own past results. Those results are critical to both the firm and the broader electric vehicle and solar power industries.

By Michael McDonald of Oilprice.com

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  • EH on January 04 2017 said:
    THEE old saying, "never count ones chickens till they hatched" remains true to all things including oil and renewable energy

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