Tillier: Tesla, Apple Talk Opens Up Opportunity

You've got to love the market rumor mill. Today, much of the noise is about this report that Adrian Perica, head of M&A for Apple (AAPL), has met with Tesla (TSLA) CEO Elon Musk. My first thought was that this was a great match not just from a business perspective but because long-term Apple investors can tell the new breed of Tesla fanatics a thing or two about restraint.

At different times I have fallen afoul of fans of both companies. When Apple was approaching $700 I wrote that the stock may have been overvalued and that exponential rises in the share price could be coming to an end. To some, this was heresy of the worst kind. Fan-boy types, however, are less in number (or at least less vocal) now that the stock has seen $400 again and Apple can be evaluated for what it is -- namely, a phenomenally successful company whose growth is inevitably slowing.

Tesla is in some ways a similar company. It, too, is known for innovation and has a devoted following who react passionately at any hint of criticism. I found this out when I suggested that Tesla may be due for a correction as the stock approached $200 at the end of last year. As with Apple in 2012, the fanaticism of Tesla's supporters was matched, if not modeled on, the passion of the company's CEO. Neither Steve Jobs nor Elon Musk could be seen as slow to defend their companies from negative sentiment.

There is, however, one enormous difference between the two companies: Apple is massively profitable while Tesla has yet to make any money. That could change when Tesla releases earnings tomorrow, but for now it holds true.

As for the business possibilities, that difference is key. It is no secret that a good deal is when each side brings something to the table that the other needs, and that is what we have here. If a deal were to take place, Tesla would inject much needed innovation and growth to Apple, while Apple would bring cash to Tesla. The problem is that is one very big "if."

If one actually reads the San Francisco Chronicle article that I linked to above, Tesla is just one of a number of options being explored by Apple as a way of diversifying away from its core business, including a possible foray into the field of medical technology. The market's rumor mill has taken over, however, and both stocks are up significantly this morning.

Fundamentally, though, little has changed as far as I am concerned. Apple still looks like a steal to me at a P/E significantly lower than the market, while I am cautious at best about Tesla. If anything, this rumor-driven move up above $200 before the company releases earnings tempts me to change my view a little. Until now, I wouldn't have been a buyer of Tesla but nor would I be tempted to short the stock.

I learned a long time ago that momentum will usually continue until there is a catalyst for a turn, and this jump based on speculation surrounding a newspaper article combined with expectations of turning the corner into profitability may well provide it. Executives at both Apple and Tesla will have seen the market's reaction to this weekend's news and will, I'm sure, be smart enough to say nothing to discourage the speculation, but sooner or later traders will realize that they have overreacted. Should that be combined with an earnings miss tomorrow, the drop will be swift and deep.

Of course, it could be that none of that will happen. Tesla, Apple or both could confirm that talks are taking place, and Tesla could announce a significant beat. What makes this trade attractive to me right now, however, is that both of those scenarios seem to be priced in to some extent. The downside of a short Tesla position would seem to be significantly less than the upside, and that, dear reader, is the kind of trade that I like.

At the time of publication, Tillier was long AAPL.

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