Detwiler Fenton Suspect Of The Value Proposition Of A Tesla-SolarCity Merger

SolarCity Corp SCTY shares are up almost 5 percent on the day, while Tesla Motors Inc TSLA trades down nearly 9 percent. Elon Musk's efforts to keep funding alive and well have left traders, shareholders and market observers puzzled.

Gordon Johnson of Axiom Capital, who was the first to call Sunedison's bankruptcy and has been consistent with his thoughts on solar, said in May a sizeable downward revision of SolarCity's guidance was imminent. Detwiler Fenton agrees with that thesis.

Related Link: Goldman Sachs Negative On SolarCity Moments Before News Hit Of Tesla's Interest

Back on April 22, Detwiler Fenton noted Tesla had an arguably bright future for itself but the analysts saw the storm clouds brewing.

"The real question will be whether the rising tide of EVs lifts most of the ships or if the apparent ripening of the market will create a major share war over the next several years."

Since then, the story for the electric vehicle market has deteriorated rapidly. In an effort to fend off the pending pressure, Tesla ran a $2 billion offering on May 18.

On May 2, more than two weeks before Tesla's offering, Detwiler noted the destruction that was on the way for the Tesla:

"Without question Tesla is an incredibly effective innovator and CEO Elon Musk a great promoter as well. But the prize is simply too large to go uncontested. All of the automakers (and perhaps Apple) are chasing the future of electric vehicles, while Alevo and dozens of other storage competitors are going after the multi-billion dollar energy storage market. The spoils of great ideas do not go uncontested for very long, and it takes a leap of faith to suggest that Tesla can and will remain top dog when the markets truly get big enough to matter. We'll be watching things closely to assess just how bumpy TSLA's road might get."

Fast forward to today, and now we're discussing Tesla possibly rolling-up SolarCity and it's no wonder Wall Street is mind-boggled. One can ponder why Tesla would want to mix itself up with a solar company that is facing one the most significant headwinds in the solar industry: Net metering.

Detwiler Fenton says:

"The most significant headwind may be a rapidly changing regulatory environment, in which the utilities are pushing back hard against solar's best friend, net metering, which allows solar owners to be compensated for every hour generated at the retail price of power. It is under immediate assault in various markets, including Nevada, where it has already been dispensed with, and Arizona, where a new rate case looks to eliminate it and add fixed charges to the residential bill. Meanwhile in Hawaii, the islands are already struggling with how to add new solar economically as they get closer to an economic saturation point - one where addition of new solar requires running the grid less economically by either curtailing output of solar or backing down base-load generation."

The team at Detwiler goes on to note the "declining competitive advantage of third-party finance" which, along with the environment surrounding net meter, is changing rapidly. Two key elements are impacting the third-party finance game:

1. Solar costs have fallen by over 50 percent in the past five years, making solar easier to purchase rather than finance.
2. Loans have recently been easier to acquire, and money is cheap.

For these reasons, it's clear why most of Wall Street is beyond confused over Musk's decision. Detwiler wrapped up their note with a key reminder for their clients: "In our view... if the companies are kissing cousins, they should probably stay that way."