Earlier this week Tesla (TSLA) announced it was going to acquire SolarCity (SCTY).

Elon Musk, the chairman of SolarCity and CEO of Tesla, called it a “no brainer.”

He may have been more right than he realizes.

This Happens At The Top

This is a bad deal. Probably awful.

Just look at the sum of the parts.

Tesla has almost everything going for it.

It has a unbeatable brand, vehement customers, and year-long waiting lists for it’s newest models.

Tesla’s brand -- as a company and a stock -- is strong enough to get people to look past the constant missed production targets and lack of any future earnings.

The real problem here is SolarCity.

Now, we get the “synergies.”

There is certainly a lot of crossover for Tesla cars and solar panels. There is a connection between electricity consumption and production. And their customer profiles are similar too. I imagine a lot of high-income, environmentally conscious, virtue-signalling types.

However, SolarCity is basically in a death spiral.

In 2013 it posted revenue of $163 million.

It’s two biggest line item costs -- Cost of Goods Sold (CGS) and Selling, General, and Administrative (SG&A) costs -- were $312 million that year.

It basically spent $1.91 for every $1 of revenue.

That’s not necessarily a death sentence for a fast-growing company. But instead of improving, it has only gotten worse as the company has grown.

Look what happened in 2014. That year the solar installer posted revenue of $255 million. A solid gain of 56%.

Costs, meanwhile, soared 83% to $571 million.

As a result, it basically spent $2.23 for every $1 in revenue.

Not good. But the the problem was the next year was even worse.

Revenue jumped 56% again to $400 million.

However, all those gains were easily offset by faster-growing costs. The two big line item costs rose 72% to $981 million.

As a result, SolarCity spent $2.45 to generate $1 in revenue.

I understand the cliche you gotta’ spend money to make money.

However, no one can last spending more money to make the same amount of money.

SolarCity was a stock that was going to zero.

Now, if the merger with Tesla goes through, it could shift its soaring losses to Tesla.

Together they’re weaker.

Sometimes a merger announcement can cause a stock to unnecessarily drop and create a great buying opportunity.

This doesn’t look like one of those times.

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