Tesla Shares Give Up Gains After Elon Musk Says He is “Still Committed” To Buy Twitter
Since Musk announced his intention to buy Twitter on April 14 for $43 billion, Tesla shares have gone down almost 29%. This means in less than a month, more than $250 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 $200 billion, most of Musk’s wealth is tied up in his 17% stake in Tesla. This Means, Elon, in order to raise the necessary capital to buy Twitter, will need 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%.
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.
Nevertheless, on May 5 it was revealed through insider leaks Musk is planning to serve as the temporary CEO of Twitter once the deal closes. This caused a 9% drop in Tesla shares.
You might think a 9% drop is an overreaction however, Musk has recently said every good minute he spends thinking about Tesla translates to a million dollars.
And finally, the third reason Musk buying Twitter has negatively affected Tesla is that Musk has taken 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.
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.
To alleviate this risk, Musk recently cut his margin loan by half by raising money from other investors willing to go with him in his Twitter deal.
And this brings us back to today. Earlier this morning, Elon Musk announced on Twitter that he is temporarily putting on hold his efforts to buy the social media platform. The reason behind Musk’s move is that he wants more evidence that bot accounts represent less than 5% of Twitter users.
Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of usershttps://t.co/Y2t0QMuuyn
— Elon Musk (@elonmusk) May 13, 2022
When Musk agreed with the Twitter board to buy the social media platform, he signed a contract stating if he chooses to back out of the deal that he will have to pay Twitter $1 billion. That is unless he can prove the Twitter board has deceived him during the negotiations.
And Musk asking for a probe of the percentage of bot accounts on Twitter has been interpreted by some as him trying to back out of the Twitter deal without having to pay the $1 billion penalty.
Given all the risks mentioned above, the news was positively received by Tesla investors and premarket Tesla shares rose by as much as 7%. However, as of writing, Tesla has given back some of the gains and is currently trading up only 5.3% after Elon Musk reiterated that he is “still committed to the acquisition”.
Still committed to acquisition
— Elon Musk (@elonmusk) May 13, 2022
Today’s price action in Tesla’s stock shows the EV maker’s investors want Musk to have nothing to do with Twitter and that most of them are hoping the deal falls through.
Sadly for Tesla investors, Musk says he’s still committed to buying Twitter. And we won’t know if the deal will go one way or the other until we get updated information regarding Twitter’s bot accounts.
We will be sure to keep you posted when more information comes out. Until then, make sure to visit our site torquenews.com/Tesla regularly for the latest news.
So what do you think? Happy Elon Musk might not buy Twitter? Also, do you think Musk buying Twitter will be bad for Tesla? 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.