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Elon Musk And Solar City

07/06/16 04:27:40 PM
by Koos van der Merwe

Elon Musk, CEO of Tesla, plans to buy Solar City, a company that belongs to his cousin.

Security:   TSLA, SCTY
Position:   Accumulate

Tesla is the most successful and biggest electric car company the world has ever seen. Solar City is the largest residential solar company in America. Both Tesla and Solar City are money losers. Tesla is dependent on billions of dollars in subsidies provided by taxpayers. Elon Musk owns a large number of shares of Solar City. With his announcement last month that Tesla plans to buy Solar City, the question on everyone's mind is... Is the purchase to protect Elon Musk's shareholding or is it to help out his cousin?

The New York Times, on the other hand, is getting it precisely right with their statement, "Imagine a world in which every home and building is a miniature power plant, with solar panels on roofs and electric vehicles and stationary battery banks in the garages."

Is Elon Musk building an empire that one should become a part of? Spacex, a company he founded in 2002, raised $1 billion in funding from Google and Fidelity in exchange for 8.33% of the company, establishing a valuation of approximately $12 billion. By owning shares in Tesla does one become a part of Spacex? Strictly speaking, no, but becoming a part of Elon Musk Empire is tempting.

Figure 1. Weekly chart of Tesla.
Graphic provided by: AdvancedGET.
The chart in Figure 1 is a weekly chart of Tesla Motors showing how the share price rose from a low of $22.54 in August 2011 to a high of $292.37 by September 2014. Since then the share price has traded sideways between $141.78 and $284.08. The recent fall shown on the chart to $193.95 could therefore be a result of the announcement by Tesla that the company was buying Solar City, or it could be the natural trend of the company's share price. The fall to $193.95 could also be the result of the BREXIT vote, where the Dow fell over 600 points. Do note that the RSI indicator gave a buy signal in February 2016 when the price of the share was $141.78.

Figure 2. Daily chart of Tesla.
Graphic provided by: AdvancedGET.
The chart in Figure 2 is a daily chart with an Elliott wave count suggesting that the share price is presently in a WAVE 4 and could rise in a WAVE 5 to $269.47. However, the fact that the PTI (Probability Index) is only 38 suggests that the wave count could change. The RSI indicator, however, is once again at oversold levels, but it has not given a buy. This will only happen should the price move above the 32 horizontal line. Finally, do note that the share price is below the lower band of the JM Internal Band indicator, having given a sell signal on June 13th. The JM Internal Band indicator is a 15 period simple moving average offset by 2% plus and 2% negative. A move above the upper band suggests a buy and below the lower band a sell.

Figure 3. Weekly chart of Solar City.
Graphic provided by: AdvancedGET.
The chart in Figure 3 is a weekly chart of Solar City. The chart shows how the price rose from a low of $10.67 in December 2012 to a high of $88.35 by February 2014. The share price then fell to a low of $16.90 by February 2016. From that low, the share price rose in a wave 1, then fell in a wave 2 to its present price of $22.20.

Figure 4. Daily chart of Solar City.
Graphic provided by: AdvancedGET.
The chart in Figure 4 is a daily chart of Solar City, showing how the share price fell from a high of $59.31 on December 16th, 2015, to a low of $16.68 by May 10th, 2016. On May 16th, the RSI indicator suggested a buy, and the share price did rise giving a buy on the JM Internal band indicator, on May 20th. However, the share price gave a sell signal on June 10th.

Owning a part of Elon Musk is very tempting for investors. Today, it looks as if one can buy Tesla shares or Solar City, which ever share price offers the best growth potential. However, the fact that Solar City was purchased by Tesla does suggest that the company has problems. Whether management by Elon Musk will solve those problems, only time will tell.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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