TSLA is significantly overvalued (fair value $121 vs market $356); high valuation blocks inevitable SpaceX acquisition.

Elon Musk once again hinted at a possible deepening of collaboration between his two companies Tesla and SpaceX. And that increasing speculation regarding the possible acquisition of Tesla by SpaceX, I think is inevitable.

I think it makes all the sense in the world. So, let's talk about what it could mean for SpaceX and Tesla stock investors. speaking at the AI summit last night, Musk said it was a great question whether the two companies would remain separate despite several avenues for collaboration.

With all this collaboration on so many levels, who can imagine what action one might take when there's so much close collaboration in so many areas, said Elon Musk.

And I agree. I think it just makes so much sense as the owner of the company, as the CEO of the company, merging them, making them one company makes so much sense. You don't have to deal with all of the extra activities that you have to deal with since it's two companies instead of one.

It creates more accounting work. It creates more work to make sure things are accounted for accordingly.

When Elon Musk, what if he's at home and he's sending an email to someone from SpaceX and then he's sending an email the next minute to someone from Tesla? How do you account for that work?

Right? Is he working at that? Is he working at SpaceX or working at Tesla? Do you have to micromanage that situation to determine the cost of the CEO's time at those various companies?

It just creates more difficulty, more tasks, more things for the employees at the companies to pay attention to, to have to pay attention to. That's not adding to the competitive advantages of the businesses.

It's putting it behind rivals that don't have to complete those tasks. It just slows them down.

I think ownership of Tesla by SpaceX makes all the sense in the world. And the reason why I think SpaceX should acquire Tesla and not the other way around, it's not that I think that should be the case.

It's just that Elon Musk has a greater control of ownership, a greater controlling stake in SpaceX than he does at Tesla. So I think Elon Musk would prefer SpaceX buy Tesla so that he can have more control over the company.

So, it's just motivation for Elon Musk to make SpaceX acquire Tesla without any other consideration about financial sense or the well-being of shareholders, which I don't think is going to be considered all that significantly.

I think the well-being of Elon Musk is going to be the primary consideration in this decision. And I think the motivation suggests, the incentives suggest that SpaceX should be the one acquiring Tesla.

Now, I think one of the things that's slowing down this acquisition is valuation. I've been talking about for a while now how ridiculously expensive Tesla stock is. And it's down 20% this year. It's down 21% this year to be precise.

I had warned investors coming into this year that Tesla stock was too expensive, the valuation was extreme, that there was limited upside given the expensive valuation.

In fact, I bought put options on Tesla stock because I was so highly convicted, I had such a high confidence level that Tesla's stock was so ridiculously overvalued that I bought put options on Tesla to begin the year.

And thankfully, I sold my put options near the bottom here, near when Tesla was around $300 per share. And I made a video about it talking about why I chose to sell my Tesla put options even though I still felt Tesla stock was overvalued even at $300.

And one of the primary reasons why I stated I sold and got out of those put options and took my profits is because how successful the SpaceX IPO was. I thought given how successful that IPO was, that would give Elon Musk and SpaceX the capital, the equity, right, they can use SpaceX stock to acquire Tesla and pay Tesla shareholders in SpaceX stock.

And I thought that limited the downside in Tesla's stock because I felt if Tesla stock was to fall further, then it would make it more attractive for SpaceX to acquire Tesla. So that was like a bottom that I felt was put into Tesla's share price that I felt limited my upside in keeping those put options.

And so I sold out of those thankfully at an opportune moment as Tesla's stock price has rallied from around $300 per share to about $356 per share.

So Tesla's fair value and I just updated this today. I calculated it at $121 per share. Now, my estimates suggest that the business will generate 111 billion in cash flow this year, negative8 billion the year after that and -6.8 billion in 2028.

That's because the company's investing so much in driverless car technology before the technology is available broadly enough to generate sufficient cash flow to offset those investments that the business will generate negative cash flow over the next few years.

But I think the rewards will be massive for Tesla in the long run. And I'm forecasting those rewards begin in 2029 with $26 billion in cash flow in 2029, increasing to 32 billion in 2030 and rising all the way up to 76.7 billion by 2035.

So I'm forecasting significant growth in free cash flow for Tesla. To put that figure into context, in 2025, Tesla generated $4.9 billion in free cash flow. So, I'm forecasting a nearly 15x increase in cash flow from its highest point in by 2035 as a result of the success of driverless car technology.

That's where I think the growth will come from for Tesla, if it comes at all. This is no certainty, but this is what I'm estimating for Tesla. EV sales are unlikely to reacel for Tesla.

And so the primary growth driver for the business, it's nearly all of its hopes over the next decade depend on driverless car technology.

As I don't think robotics will be a meaningful driver of the company's free cash flow anytime over the next decade. Maybe after that, maybe starting in 2040, Tesla might, if they start to generate benefits from their investments in robotics.

For now, I think the primary driver will be driverless car technology.

So, even after giving them credit for phenomenal growth over the next decade, I calculated a fair value estimate of $121 compared to the current market price of 356. So, you would have to assume about triple the level of growth that I'm estimating for Tesla in order for the valuation to begin to make sense at $356.

So, it's very very expensive when measuring on a discounted cash flow basis. When you measure on a forward price to earnings basis, it's trading at $165. So, also very very expensive when you're measuring on a forward price to earnings basis.

And so the valuation is just extreme. And I think that's the primary headwind stopping an acquisition. So if Tesla's stock price was to decline, if there would be another big crash where Tesla's stock price approaches $200 per share, I think that will be the accelerant where Elon Musk will see that as an opportunity.

Like let's get this rolling now at $200 per share. Let's begin the work. Let's begin to inform investors. Let's begin to call investment bankers. Let's get the news out there that we're beginning to take steps to make this acquisition, if not for the very least to put that floor into Tesla's stock price to stop it from crashing even further and keep the share price elevated.

Give the company time to develop the driverless car technology, making it more broadly available. all the testing, all the regulatory approvals that the company has to go through in order to make this more broadly available so that it can generate sufficient cash flow to offset all of the investments that need to go into it to offset the declining profitability of the EV segment overall.

So in my opinion, I think this is inevitable. The question is when. When is the question and one of the most opportune moments could be during a big sell-off in Tesla stock if it ever happens.

Part of the reason why Tesla stock is increasing is because investors are frontr running that move. Investors are buying Tesla stock in anticipation of a potential acquisition, in anticipation of a broader roll out in driverless car technology.

Tesla stock investors have always been the type to frontr run any development, right? They get ahead of the actual development. They buy the stock before anything actually happens. So that's something to keep in mind here.

I think it's just inevitable. I think it makes sense from a business standpoint. From a valuation standpoint is where I think there's the roadblock in making that happen. But from a business standpoint, from a management standpoint, from competitive advantage, building competitive advantage, you want to have these two companies combined to give you the most uh efficient operation of a company.

So your CEO is not focusing his attention on several different companies and focusing his attention on these two combined into one.