4 Reasons Tesla And SolarCity Are 'Not A Good Fit'

Axiom's Gordon Johnson believes SolarCity Corp SCTY and Tesla Motors Inc TSLA is not a good fit, especially given the current net metering regulations.

Johnson maintained a Sell rating on SolarCity, with a price target of $7.

Following Elon Musk’s comment that this acquisition was a “no-brainer” as well as discussions with solar market experts in the U.S., the analyst believes “given current regulations, net metering mitigates, to essentially zero, the need for residential battery systems the likes of which both TSLA sells & used as the key rationale for buying SCTY – because the grid effectively functions as a storage unit.”

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Also, given the lack of synergy, as well as the potentially added costs of training every Tesla salesperson, the analyst believes the combined COGS of the Tesla-SolarCity merger would increase by 20 percent initially, contrary to Musk’s expectation of a decline of 20-40 percent.

Deal Impact

The analyst believes the deal could lead to 10 percent downside for Tesla’s stock and about 10 percent upside to SolarCity’s share price.

The analyst expects SolarCity’s shareholders to approve the deal, and noted that the key to the deal closing was convincing Tesla shareholders.

Johnson believes there is a 60/40 probability of the deal closing.