Tesla stock plunged 4.8% yesterday even as the company officially allowed buyers to purchase its cars using bitcoins. The Elon Musk run company has already invested $1.5 billion in bitcoins and plans to retain the bitcoins that buyers pay to purchase its vehicles.
Last year, Tesla had raised $13 billion by issuing shares thrice. NIO, also known as the Tesla of China, also issued shares thrice. While NIO was in dire need of cash to fund its cash burn, Tesla wasn’t really in need of cash.
Tesla and bitcoins
In fact, during the company’s fourth quarter earnings call in January 2020, Musk had categorically denied that the company would need to raise capital and expressed hope that it would finance its capex with internal accruals. Indeed, Tesla was free cash flow positive in 2020 despite spending aggressively on its new plants.
However, after the $13 billion capital raise, Tesla is now a net debt negative company and has more cash than debt on its balance sheet. While that may be comforting for the company it also means that its current cash needs are fewer than the cash on its balance sheet.
Bitcoin would add to Tesla’s profitability
What better way to invest the cash than invest it in bitcoin that has been on an uptrend? Earlier this year, Tesla announced that it has invested $1.5 billion in bitcoins. Tesla has likely made more profits on its investment in bitcoins than it has made in its history. Here we are talking about the GAAP profits even as the company also publishes a much higher non-GAAP number that among other things excludes the share-based compensation. The company’s GAAP net profit margin is only about 1% and even that is entirely due to the carbon credits. Tesla’s net profit would turn into a net loss if not for these carbon credits.
Markets are divided
Like every other Tesla move, the announcement divided markets. Bitcoins are extremely volatile and buying them would only add to Tesla’s risk profile. “Elon Musk has exposed Tesla to immense mark-to-market risk,” said Peter Garnry, head of the equity strategy at Saxo Bank. Gary Black, former chief executive of Aegon Asset Management also announced that he has sold his shares after Tesla invested in bitcoins. “$TSLA has always been a higher risk, but investing $1.5B in #Bitcoin makes it more risky,” tweeted Black.
Tesla’s risk profile rises with bitcoins
King Lip, chief strategist at Baker Avenue Wealth Management echoed similar views. “It will add volatility to the stock due to exposure to bitcoin,” said Lip whose company has been holding the company’s shares since 2015. Lip added, “This is better for bitcoin than it is for Tesla,” added Lip.
Meanwhile, on the other end of the spectrum are perma Tesla bulls like Cathie Wood of ARK Invest and Dan Ives of Wedbush Securities that see it as a smart move. “[W]e do not want the bitcoin mania to overshadow the underlying EV hyper growth story taking place at Tesla. Herein lies the fundamental driver of the stock’s value,” said Ives.
Cathie Wood on Tesla
Wood recently raised her 2025 target price on Tesla to $3,000 which would imply a market capitalization of $3 trillion. Many have been critical of the valuation model and assumption and it looked a case of price target justifying the assumptions than vice versa.
Meanwhile, Tesla has been more of a story built on assumptions and hope rather than hard financials. No wonder, Ashwath Damodaran, known as the “dean of valuation” values the electric vehicle maker at a fraction of its current stock price.
There has been a bloodbath in all electric vehicle stocks. NIO, Nikola, XPeng Motors, and Li Auto have also tumbled. Churchill Capital IV (CCIV) which is set to merge with Lucid Motors and had surged to as high as $65 on the rumors, is now down to the low $20s. Even now CCIV stock looks pricey as the company is yet to deliver its first car.
Talking of Tesla, it still has a market capitalization of $600 billion which is again hard to justify unless you use the “bullish models” that many analysts develop.
The biggest risk for electric carmakers is the impetus that legacy automakers like Ford, General Motors, and Volkswagen are giving on electric cars. General Motors became the first Detroit automaker to commit to a 100% zero-emission future and plans to sell only zero-emission cars by 2035. Ford plans to sell only zero-emission cars by 2030 in Europe and earlier this year it doubled down on its investment in electric cars and autonomous driving.
The biggest announcement meanwhile came from Volkswagen which plans to become the leader in the electric car market by 2025. Going by the forecast provided by UBS, Volkswagen might rival Tesla as early as 2020 when UBS is forecasting both companies to deliver 1.2 million electric cars each.
How to buy Tesla stock
Coming back to Tesla, while Tesla bulls might see value in the stock at almost every level, the electric vehicle bubble has finally started to bust. In 2020, Tesla rose 740% while NIO rose over 1,100%. Fast forward to 2021, and both these stocks along with all other electric vehicle producers are down sharply from their 52-week highs. It could only get worse from here as legacy automakers ramp up their electric car plans and give a real challenge to pure-play electric car companies.