Weekly comic strip: Elon Musk’s dangerous distraction
By Geoffrey Smith
Investing.com — Elon Musk’s acquisition of Twitter (NYSE:) could be the act that finally brings Tesla’s (NASDAQ:) gravity-defying stock price down to earth.
For one thing, no amount of corporate finance jargon can hide the fact that Musk is selling one stock to buy another. The old rule – “if the person who knows the business best sells, do you really want to buy?” – still holds.
That certainly holds true when you consider that this is the second time in six months that Musk has taken money off the table, having sold more shares than he needed last fall to pay his bill. federal income tax. The stock, whose valuation has defied gravity throughout the pandemic, has not hit a new high since the first of those selloffs.
The rule is worth even more when you consider the potential Twitter ownership has to distract the CEO of Tesla from his day job. Tesla is a company that is still in the early stages of a multi-year expansion phase, with execution risks every step of the way and the company’s first-mover advantage gradually eroding. The chance that Musk can handle Tesla (NASDAQ:) as well as before while trying to mediate disputes between the mad fringes of American politics and root out Russian or Chinese misinformation is surely not high.
Tesla has always had a high element of risk for key people, and this decision only exacerbates it. It’s hard to see how owning Twitter makes its presence on the platform even more of an asset to Tesla’s general marketing, and all too easy to see how it could weaken it. Jeff Bezos’ question about Chinese influence on business is relevant: what price freedom of speech, if those who run your biggest future market don’t like it?
So what, says the fanbase. Elon has a history of multitasking. SpaceX, Neuralink, The Boring Company – none of that stopped him from delivering to Tesla. Why Twitter?
The obvious answer is that none of the above comes close to the political sensibility of a mass media platform, in a country that is never more than two years away from an election. The obvious second answer is that Musk may struggle to turn around a company that has historically struggled to turn a user base of hundreds of millions into money.
“I don’t care about the economy at all,” Musk said at a recent TED event, as he spoke about his vision of Twitter as a platform for free speech and deep debate. . It’s the kind of conversation that underpins his friendship with former CEO Jack Dorsey, who said “I trust his mission to expand the light of consciousness.” (Dorsey is one of the few current shareholders that Musk would like to continue co-owning after taking Twitter private, thereby reducing his own upfront costs.)
However, Dorsey himself failed to capitalize on this vision, and Twitter badly needs to make money from day one. It will have to repay more than $13 billion in debt, directly or indirectly, due to the structure of the $44 billion deal, at a time when interest rates are rising sharply. For comparison, in the two years before the pandemic, the company made less than $400 million before profit and tax, which is not enough to cover a year of 2% debt financing.
Another $12.5 billion debt is a margin loan to Musk personally, secured by $62.5 billion of Tesla stock owned by Musk. The terms of that loan and Tesla’s own internal guidelines limit the amount Musk can borrow from his holdings to 20%. Since more than half of Musk’s 163 million shares are already pledged against other debt, Musk would only have a limited ability to provide additional collateral if the value of Tesla’s shares fell sharply.
According to Bloomberg’s calculations, if the stock falls below $837 – just 8% below its current level – then Musk will need to raise funds to provide the additional collateral. Since the vast majority of Musk’s wealth is tied to Tesla stock, this would most likely mean forced sales. Musk, meanwhile, is hoping the stock can hold above until his next wave of options — worth up to $23 billion as part of his 2018 severance — is acquired. While the company’s first-quarter earnings appear to have triggered the release of most of these options, cashing in can be complicated if the company suffers a downturn and has to hand over those billions as its free shareholders suffer losses.
Granted, most Wall Street analysts — not to mention Tesla’s dedicated retail investor base — have target prices for the stock comfortably above that key $837 level.
Yet the reality is that, even after a 22% decline from its all-time high in April, the stock is trading at 117 times earnings, 10 times its expected 2022 sales and, most strikingly , a value globally equal to all the others. household names in the global automotive industry together.
These valuations tend not to survive cycles of sharp monetary tightening. Regardless of Tesla’s long-term outlook, short-term overshoot looks decidedly dangerous.