Elon Musk's Strategic Tesla Exit
Originally: February 12th
Website Up:March 8th 2023
When Elon Musk entered Twitter’s headquarters, he uttered the famous words “Just letting this sink in.” This last statement has never been more true. After Elon decided to buy Twitter, its potential value has sunk, and its potential for making revenue has decreased. If Twitter was still trading as a public stock, the graph would have shown that it was sinking like a toilet to the depths of the ocean. The company is not profitable, it is overleveraged with loans, and has huge operating costs, while the American recession causes advertisers to spend less and less on Twitter. Musk said at the TED2022 conference about buying Twitter that “this is not a way to make money.” So why on earth would you buy a company that will take very long to get profitable? There might be a chance that the company actually never even gets to the point of profit, because of its bad business model. Well, I think that Musk actually had ulterior motives for buying Twitter, which is a long-term investment. It was a way for him to hide his true intentions: that he actually wanted to sell a big part of his Tesla stocks and put the money in something safer. He wanted to take some risk out of the equation as there were more and more red flags last year that Tesla would not be able to pull off what it had promised. But I assume that Musk did not want to sink the value of Tesla stock, which would have happened if he sold half of his shares without giving a reason. So he decided that he needed the acquisition of another company as an excuse. In this case, Musk moved a big part of his net worth from Tesla to Twitter. Whether that was a smart decision and actually took away some of the risks, is doubtful. But I think it is clear he had ulterior motives. As the New York Times describes it, on October 27 “the six-month path to buying the social network” (then attempting to back out of buying, then being sued back into buying) was completed. It was a fun “rollercoaster ride” for the many people involved with it. Musk tried to pull out of the deal with some peculiar excuses after waiving away the “due diligence” part of the deal. And then he realized that from a legal standpoint, he probably would be forced to go through with it. So Musk’s intentions are murky at best here. While he doubted if he really wanted to buy Twitter, he did continue selling Tesla shares. That is striking. It is like saying you are going to move houses, but that you are not sure if you want to buy a new house. In the meantime, you still sell your old house while the market price for houses is high. He sold most of his shares long before finally agreeing to buy. I argue that this tells us two things: he did not really want to buy Twitter, but selling Tesla stocks was more important for him than closing the deal. He could have waited three more months before selling his first batch of shares. And at the time he still thought he could stop the Twitter buyout. So why sell Tesla stocks and then back out of the deal? Tesla stocks have long been overvalued, with serious investors like Michael Burry (the one guy that predicted the 2008 financial crisis) predicting that the stock would come down hard and betting money on it. He was unfortunately too early – he closed his short position in November 2021, while the stock only plunged after September 2022. Over the past couple of years, many famous investors have pointed out that Tesla shares were extremely overvalued. Burry has called it “a soufflé” and Warren Buffett has claimed that the investment is risky and that “it’s not easy” to be a winner in the car market. That is from the guy who has seen the dawn of the American automotive industry, and that out of the 2000 car companies, only three survived. And now even Bill Gates has made bets against Tesla, pointing to the small production capacity as the main reason for his short position. Once, Tesla stock was valued more than the next 10 automakers combined. Investors at the time called it “a ridiculous comparison, but hey, the CEO walks on water.” This was at Tesla’s peak price on October 25, when its valuation was as much as Toyota, Volkswagen, BYD, Daimler, General Motors, BWM, Ford, Stellantis, Honda, and SAIC combined. Interestingly, Tesla produced under 1 million vehicles in 2021, while the other car companies produced 75 million vehicles combined. With Tesla experiencing supply chain issues, a shortage of raw materials and chips, and the effects of covid lockdowns in China, it is likely that Musk saw extensively what kind of problems Tesla had and still has. However, Musk has said in his personal letter on Twitter that “the reason I acquired Twitter is because it’s important to the future of civilization to have a common digital town square, where a wide range of beliefs can be debated.” He wanted to keep speculation away from Tesla and SpaceX and tried to persuade investors in his other stocks that Twitter was merely an ideological buy. He said he “wanted to reach out personally” because “there has been much speculation.” He is talking about Tesla stock speculation of course. The kind of downward speculation that is bad for his net worth. That is why it is good to reassure his fellow investors that Tesla is still a safe place to store their money. Meanwhile, things at Twitter have not been going smoothly. Twitter made 5 billion in 2021, with 4.5 billion coming from advertising revenue. This revenue has largely disappeared over the course of Twitter’s second quarter from $513 million net income to a net loss of $270 million. This has to do with advertising companies stopping their spending on Twitter because of worries that their content might be associated with misogyny, racism, hatred, and extreme content. Advertisers have called Twitter a riskful place for brands. Musk has claimed after all that he would allow no kind of censorship under his rule. As one news channel has pointed out, the potential revenue for Twitter Blue is only around 400 million dollars a year if everything goes right from the start. Which it hasn’t. The new Twitter Blue has had to fight off spam users and bots ready to abuse the trustworthy check mark to make some bucks. Twitter is also not a profitable company, nor is it the world’s largest online chat service. Even Pinterest, Telegram, SnapChat, TikTok, and Facebook Messenger are bigger than Twitter. Nor does the whimsical billionaire seem very suitable in building relations with the advertising industry. Musk has been against ads for a while and has come up with other alternatives, trying to shift away from advertising. In a New York Times article, advertisers said such a shift would hurt Twitter. “At the end of the day, it’s not the brands who need to be concerned, because they’ll just spend their budgets elsewhere — it’s Twitter that needs to be concerned.” Another problem is that Twitter has a few large brands that make up the bulk of its income. These mainstream companies “tend to be wary of their ads appearing alongside problematic content.” In the last couple of months, 500 advertisers have pulled out of the service, among them half of Twitter’s biggest advertisers. Together they have spent more than $2 billion on ads since 2020. Revenue that is now missing. Musk took it personally and tweeted back to the advertising industry “Thank you. A thermonuclear name & shame is exactly what will happen if this continues.” Even though business is business, Elon rather blamed the loss in revenue on “activist groups pressuring advertisers.” But this has less to do with activists pressuring advertising companies, than with advertisers not wanting to risk brand damage and being spooked by important Twitter executives leaving. The largest advertising conglomerate IPG recommended their clients to pause spending before Musk would implement even more of the big changes he had in mind. He had already allowed suspended users back on the platform by way of polling, including Trump and other controversial figures. So business at Twitter is bad, kind of like Elon had expected. He has not been able to turn things around, and has laid off around 7,500 workers. Meanwhile Tesla stock has plummeted. As one investor notes, “some of that drop has come from his share sale to fund the $44bn deal, while the stock also lost [value] due to worries among investors that Musk has been distracted by the social media company.” But it also has to do with the business itself, which produced 10% fewer cars than expected. Originally it should have drastically ramped up production over the past few years. Most of the problems were already in the making, and of course Musk has known about these problems for some time. He drove up excitement with rosy pictures about autonomous Tesla cars by constantly claiming the feature was almost there. After the whole Twitter debacle had ended, Musk confirmed on October 20th that Tesla’s autonomous driving feature (which is still sold on the website for $15,000) was not approved by authorities during testing in the last couple of years. He has repeatedly blamed the regulatory process for this, but some investors are worried that this slowdown has to do with the difficulties of implementing artificial intelligence. This is a substantial indicator that Tesla’s innovation might have been hyped up. Also the timeframe is interesting, because Musk tells investors about this problem only after he has sold his shares. This seems like the end of a pattern where Musk optimistically predicts that Tesla cars will be autonomous very very soon. Musk started predicting this near future every year since 2014. I can imagine that Musk as CEO had some early knowledge about these failed tests and considered that this might negatively impact the value of his stocks. Musk’s decision to buy Twitter was never clear. Nevertheless, he continued selling. In April Musk sold 8.5 billion dollars while still thinking about acquiring Twitter. He claimed that there would be “no further TSLA sales planned after today,” referring to Tesla’s stock ticker TSLA. Then he announced on April 13 that he planned to back out of the deal. He had still pocketed the money from selling his TSLA shares. No signs he was investing the money back into TSLA stock. His main argument for canceling the Twitter deal was the amount of fake accounts, spam users, and bots on Twitter. A problem that he had disregarded in April. Then in July, he made definitively clear that he was backing out of the deal, still thinking he had some chance. He was consequently sued by Twitter to honor the original agreements of the deal. Then in August, Musk sold another $6.9 billion, promising to reinvest it as soon as the Twitter trial was over. Just in case he was short on cash, with the noble purpose of “avoid[ing] an emergency sale of Tesla stock.” Part of this reasoning was that he feared “some equity partners” might not “come through” thus leaving him without the cash. There are no indicators this was actually true as none of his equity partners signaled these intentions publicly. He made clear he was not planning to sell any more stocks. But after Musk settled the legal suit, he again sold some more stocks on November 8th. This time worth $3.95bn. I guess this was just sealing the deal. His total selloff was then nearing $20 billion while Tesla stock had dropped 46% until then. The car company had also missed Wall Street’s expectations with revenue that was down $680 million and car output that was far behind targets. He did not say whether he would sell more stocks. And then on December 12, he once again sold more stocks. This time worth $3.6 billion dollars, making his total sales of the year “just under $23bn, according to VerityData” according to the Guardian. Predictably, Musk once again signaled that he would not sell further shares.This time he was not lying as he has thus far not sold more stocks. During a talk with investors, Musk opened up and said he expected a serious recession in 2023 that would impact the car industry. I think that after Musk was done selling, he was not afraid to show his ulterior motives anymore. Other reasons, like expecting a bad couple years for the American car industry and Tesla were mentioned. Promptly, Tesla stock value decreased. But that did not matter to Musk, because he had withheld some of this information and profited from it. The whole Twitter adventure started however, when he wanted to move some of his Tesla funds to a safer place. As they say in the world of finance, you have to ‘divert’ some of your portfolio to make it less risky. Although Twitter was not very profitable short-term, Musk probably saw it as a safe long-term investment. He started buying Twitter shares from January through March of 2022, and when he eventually made an offer to buy the company for $43.4 billion in April, it seemed reasonable. The reason for Musk selling his Tesla stocks and putting them in another company has everything to do with how Tesla is performing right now. Which is not good, compared to its overvalued share price. When the economy is pulled into a recession, that share price will be hammered like a “souffle” while competitors successfully continue to increase their electrical car output. Tesla’s long term perspective has become more and more negative, and as CEO, Musk has strategically manipulated the stock value so he could sell his shares at a high price. Although Twitter is risky, Musk was quite optimistic about its future. Unlike Tesla, where Musk has seen the writing on the wallstreet.
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