NEW YORK (TheStreet) -- Shares of Tesla (TSLA) and SolarCity (SCTY) were higher in late afternoon trading on Thursday, as the two companies hold separate shareholder meetings to vote on the proposed merger, worth $2.6 billion. Analysts expect the deal to pass.
Tesla CEO Elon Musk thinks the two companies are a match made in heaven, saying that they could build solar roofs, energy storage units for homes and continue building Tesla's electric vehicles.
But SolarCity shareholders are best off selling their shares ahead of the vote results because they're not worth owning from a risk-reward perspective, Axiom Capital managing director Gordon Johnson said on CNBC's "Power Lunch" on Thursday afternoon. The firm has a $16 price target on the stock.
The upside is roughly 2% if the deal goes through, he said. But if the deal doesn't go through, then the firm sees the downside at over 70%, with shares falling to $6. "We think you play the downside scenario here."
In addition, the deal is "absurd" to begin with for a couple of reasons, Johnson said.
First, SolarCity has burned through its free cash flow each quarter since the 2013 fourth quarter. Second, SolarCity's core business is net metering, a system in which solar panels are connected to a public-utility power grid so that surplus power can be transferred to the grid. Solar energy system owners are then given billing credit for the energy they added to the grid.
But if Tesla brings in its proposed battery technology then that would make SolarCity's "whole business go away," Johnson said. "If you bring in battery technology you're effectively saying you should store power in batteries vs. in the grid, which is what net metering does."
Separately, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author.
TheStreet Ratings team rates Tesla as a Sell with a ratings score of D+. This is driven by a number of negative factors, which the team believes should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks that the team covers.
You can view the full analysis from the report here: TSLATSLA data by YCharts