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Since Musk announced his intention to buy Twitter on April 14 for $43 billion, Tesla shares have gone down almost 47%. This means in less than a year, more than $500 billion has been wiped off Tesla’s $1 trillion market cap.
Yes, in the meantime all growth stocks have experienced a huge sell-off however, Tesla’s losses have undoubtedly been exacerbated by Musk’s Twitter deal.
There are 3 main reasons why Musk buying Twitter has caused Tesla shares to go down.
First, although Elon Musk is the richest person in the world with a net worth north of $185 billion, most of Musk’s wealth is tied up in his 17% stake in Tesla. This means, in order to raise the necessary capital to buy Twitter, Musk had to sell his Tesla shares.
And between April 26 and 29, this is exactly what happened. Although Tesla reported a record-breaking quarter several days prior, out of the blue on April 26 Tesla stock started to crash. And in the next few days, Tesla’s stock price starts to recover only to give up all the gains on the same day.
At the time, the reason Tesla’s stock price was going down was a head-scratcher for the EV maker’s investor community. However, on April 29, in a filing with the Securities and Exchange Commission, it was revealed that Elon Musk selling Tesla shares was the reason the EV maker’s stock went down by 18%.
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According to the filing, in those 3 days, Elon Musk sold 9.6 million Tesla shares to raise $8.5 billion to fund his Twitter buyout.
The second reason Musk’s Twitter deal has negatively affected Tesla shares is fears that Musk’s attention will be diverted to Twitter. Musk is one of the busiest people on earth, on top of running Tesla full-time as the CEO, the serial entrepreneur also serves as the company’s Chief Product Architect.
Musk is also the CEO of the space venture he founded, SpaceX. At SpaceX, Musk holds a significant engineering role serving as SpaceX’s Chief Technology Officer.
On top of all this, Musk is also involved in the tunneling venture he founded, The Boring Company, which recently announced it will be building a working Hyperloop.
Add to this, his involvement at his neural implant startup, Neuralink. And to put the icing on top, Musk is also a father to 7 children. By now, I assume you can see how constrained Musk’s time is.
However, despite everything he has going on Musk has now taken on the role of Twitter’s CEO, and from his tweets, it appears that Musk is deeply involved in the daily activities of the social media platform.
And finally, the third reason Musk buying Twitter has negatively affected Tesla was Musk’s (later abandoned) plan to take out a $13 billion margin loan against his Tesla shares to buy Twitter. If you happen to be unfamiliar, a margin loan basically entails using shares in a company as collateral to borrow money.
Margin loans are a creative way to increase cash holdings without having to sell shares. Basically, they allow you to have your cake and eat it too. However, the problem begins if the share price starts to tank.
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After the share price goes down by a certain amount, the person who took a margin loan will get a margin call. At this time, the debt holder will be forced to sell his/her shares to pay back the loan. And the more the person is forced to sell, the more the stock price goes down causing a downward spiral and huge losses.
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To alleviate this risk, Musk entirely abandoned plans to take out Tesla backed margin loan and instead directly borrowed $13 billion to fund his Twitter purchase.
And this brings us back to today. Earlier this morning Bloomberg came out with a report stating “Elon Musk’s bankers are considering providing the billionaire with new margin loans backed by Tesla Inc. stock to replace some of the high-interest debt he layered on Twitter Inc., according to people with knowledge of the matter.”
According to Bloomberg, Musk is reconsidering taking out Tesla-backed margin loans because the $13 billion dollar debt he took out to buy Twitter has an annual interest fee of $1.2 billion and this interest fee is causing stress on the social media platform’s financials.
Given Tesla shares are already down more than 50% year to date, this news will undoubtedly anger Tesla investors who have lost a fortune in 2022.
Having said that, as of now, no final decisions have been made considering the issue and it’s still too early to speculate how this news will affect Tesla shares.
However, we will be sure to keep you posted once we learn more about Musk’s plan and its effect on Tesla’s share price. Until then, make sure to visit our site torquenews.com/Tesla regularly for the latest news.
So what do you think? Disappointed to learn that Musk is considering taking out Tesla-backed margin loans to ease Twitter’s debt burden? Also, if Musk goes through with the margin loan how do you think that will affect Tesla’s stock price? Let me know your thoughts in the comments below.
Image: Courtesy of Tesla
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Tinsae Aregay has been following Tesla and The evolution of the EV space on a daily basis for several years. He covers everything about Tesla from the cars to Elon Musk, the energy business, and autonomy. Follow Tinsae on Twitter at @TinsaeAregay for daily Tesla news.
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