The roller coaster surrounding Elon Musk’s failed effort to take Tesla private resurfaced the topic of Apple buying Tesla.

If Tesla successfully turns the corner to profitability, the combination of the two companies is nothing more than a fairy tale, as both companies would want to retain design control. Our bet is that Tesla is successful and reaches sustained profitability in a year.

The twist: If we’re wrong, and Tesla fails to reach profitability in the next year, Apple gains the upper hand and becomes the most likely investor or buyer. Both companies share a passion for hardware design, software, AI. Plus, Apple’s balance sheet makes the combination viable. Google is the next most likely acquirer. We don’t see a traditional automotive company as a potential acquirer, given they lack the cash needed to purchase Tesla even at a distressed valuation.

Given Apple’s and Google’s ambitions in autonomy, Tesla won’t go to zero, but a sale would likely be well below Tesla’s current $54B market cap. How much lower? It’s hard to say. Let’s go over why it sounds so good: Outside of an outright acquisition, what if Apple simply made a $10 billion equity investment in Tesla instead? It sounds so good — Apple working with Tesla. In theory, it would make our lives so much better. Imagine all of the things you love about your iPhone, perfectly integrated with all the things Tesla owners rave about. The two tech giants could take over the auto industry over the next 20 years as consumers embrace electric vehicles and automation. From Telsa’s Perspective. Tesla would no longer have to be a public company. Tim Cook would be the steady hand, and Elon Musk would be the renewable energy visionary. A $10 billion cash infusion would all but eliminate any current or future cash problems for Tesla. While a $10 billion equity investment would cause ~20% dilution today, it would likely have a long-term benefit on Tesla’s stock given the removal of the cash question. We believe Apple could and would want to provide resources from their world-class hardware, software, and AI teams to make Teslas even better. The investment would likely remove Apple as a potential direct or indirect competitor in the autonomous vehicle space. Additionally, Tesla’s Model 3 could be showcased in Apple’s 511 retail stores in 21 countries. From Apple’s Perspective. Investors would feel that Apple is actually doing something with their cash, which would be a positive for the stock’s multiple. Apple would be investing in a company that has the potential to be multiple times bigger over the next decade. Apple would not be spending on the impossible, like building its own car to try to catch Tesla. Apple would be investing in making the leader even better. The impact of AI and robotics on the automotive sector is one of the next mega tech trends, and Apple would take the pole position.

Now, why an equity investment won’t happen:

Apple and Tesla are single product visionaries. Single product visionaries create world-class consumer products. Steve Jobs with Mac and iPhone, and Musk (even with his issues) with Tesla. These visionaries are able to build cultures that create great products. If you try to merge two unique cultures, you usually end up with mediocrity. If we as consumers want the best products, we should want Apple and Tesla to keep their cultures separate and do it their way, even if it means competing with each other in auto.

It’s hard to imagine Apple doing a deal without some deeper operational partnership or influence on the product, given their work in the auto sector. An investment in Tesla, an American automaker, has very different strategic implications than the investment in Didi Chuxing, a ride-sharing platform in China. Apple has a board seat at Didi and can exert some control; it’s hard to imagine Tesla management welcoming outside influence on their products when they already make the best car in the world.

Musk won’t let it happen, and more importantly, shouldn’t let it happen. There is a deal Tesla might accept, but Apple likely wouldn’t. Tesla might agree to a $10 billion cash investment from Apple if Apple were to accept non-voting shares and have no operational influence. Apple would essentially act as a silent equity investor. If Apple were to invest $10B and get voting shares, they would be the largest voting shareholder in the company, surpassing Elon Musk.

As has been popular with large Internet companies, Tesla could create a non-voting share class that would enable Musk to retain his position as the largest voting shareholder in the event of an Apple investment. While great in theory, we don’t see Apple agreeing to non-voting shares. Apple’s philosophy on the use of cash outside of repatriation has been to generate operational benefits. We believe Apple would want some influence on Tesla in order to feel confident they could generate operational benefits.

And why an outright sale won’t happen:

Tesla doesn’t want a sale to happen. People often ask why Apple doesn’t just buy Tesla outright. While Tesla doesn’t have dual-class stock arrangements like some other companies, it does have supermajority voting provisions that protect the company from “unsolicited acquisition attempts and hostile takeover initiatives.” The supermajority provision means an acquirer would need two-thirds of shareholders to vote for a change of control.

Elon Musk owns 21% of Tesla, so it would require 83% of the non-Musk shares to vote for the sale, which would be unlikely given shareholder and insider support for Musk. It’s fun to talk about Apple buying Tesla, but we don’t think Tesla is for sale.

It’s important to understand how much Musk loves Tesla. He’s endured quite a bit for the company recently. On a recent earnings call, he said, “I expect to remain with Tesla essentially forever.” We believe Musk has a very long-term vision for Tesla and that money is not his primary motivation for that vision.

Apple is rebuilding its auto initiative

After scaling back Project Titian (Apple’s auto initiative) in 2016 and 2017, Apple appears to be rebuilding the team. Most notability, earlier this month Apple re-hired Doug Field from Tesla, where he was head of vehicle engineering and one of four top executives named in Tesla’s proxy. Additionally, CNBC reported last week that 46 people have left Tesla to join Apple since the beginning of 2018. We caution that the number may be misleading; we don’t know how many people left Apple to join Tesla in this same time span. Either way, it’s clear Apple has big ambitions in auto, but difficult to see what those ambitions will bring. We still don’t know if we will see an Apple-branded car, a ride-share fleet, or a partnership with an existing automaker.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.