What Tesla Should Do with Its Cash Hoard
What Tesla Is Spending Their Cash On
- Tesla is spending their cash on research and development
- Tesla is building its Giga factory in Berlin and Austin (TX)
- They are buying minerals and parts from suppliers for their Giga factories and batteries
- They are paying Elon Musk and others with stock compensation
- They are producing amazing vehicles, like the Tesla Model S Plaid
- They are creating full self-driving software and eventually a robo-taxi network
- They increased their total employees by 20,000 in 2020
- They are expanding an energy business
So, we know that Tesla is spending their cash on some things. But they are generating more money than they can spend on running their business. This is evident by the rapid increase in their cash reserves. It’s a nice problem to have. Tesla has just over $8 billion in cash a year ago – they have more than doubled their money and that includes an investment into the volatile cryptocurrency, Bitcoin. And, with a proposed tax credit, this money generation will only get better.
Tesla continues to increase their operating cash flow and the amount of money paid per $1 put back into the company for research, building products, paying employees, etc… But there appears to be a limit to this, otherwise Tesla would be spending more of their cash.
What Could Tesla Spend Their Cash On?
Tesla could buy Ethereum or other cryptocurrencies
We know that Tesla bought 1.5 billion in Bitcoin. Are there other cryptocurrencies Tesla could buy that would be better than holding its cash? Let’s take a look at a few cryptocurrencies (as of 5/30/2021):
- Dogecoin +0.307498 (+6,567.66%) since 12/31/20
- Ethereum +1,688.0579 (+228.45%) since 12/31/20
- More Bitcoin +6,237.18 (+21.52%) since 12/31/20
- Source: https://www.barchart.com/crypto
It appears the meme cryptocurrency Dogecoin has performed the best, but that is no indicator it will do so for the future. Second is Ethereum, with third Bitcoin. All three have gone down quite a bit from their all-time highs this year and there is no indication of what they might drop to, or rise to, in the future. A deep dive technical analysis could be done, but that is beyond the scope of this article.
I would recommend that Tesla not invest anymore into cryptocurrency as they already have $1.5 billion in Bitcoin. The primary reason for this is the backlash they would get form investors and shareholders and not because I don’t think cryptocurrency will go higher in the future.
Tesla could buy short term bonds
Short term bonds are considered one of the lowest risk investments there is. They also pay the least. For instance, the Vanguard Ultra Short-Term Bond Admiral Shares ($VUSFX) pays 1.11% a year. That means at a current price of $20.15, you would receive in dividends over the course of the year, about 22 cents per share. Not a great return, but still better than just holding cash.
On Twitter, I responded to a user that said Tesla should put $15 billion into the $JPST fund, which is similar to the above-mentioned bond fund. The performance is similar.
If Tesla invested $10 billion into $JPST it would yield just over $67 million a year (after a 39% tax). If $15 billion, then just over $100 million a year (after 39% tax).
— Jeremy Noel Johnson (@AGuyOnlineHere) May 30, 2021
If I were Tesla, while I was waiting to decide what to do with my cash, I would put it in stable bond funds for a short time (half a year or less). But I would be thinking very hard what to do with the cash when ready to sell the bonds – and this would assume there is enough buyers when the time came to sell.
Tesla could buy higher yielding investments
There are much higher yielding investments. $JEPI, which comes from the same company as $JPST, yields 7.50%, which is about 7 times more than $JPST. So far, it’s proven to be stable, but only because the stock market has gone up since its inception (May of 2020). It has yet to be tested by a market downturn.
Tesla could put 10 to 15 billion in cash here and start yielding a large amount of profit each quarter. This would be great if the fund stayed at or above what was paid for it.
If Tesla invested $10 billion into $JEPI it would yield just over $460 million a year (after a 39% tax). If $15 billion, then just over $690 million a year (after 39% tax).
— Jeremy Noel Johnson (@AGuyOnlineHere) May 30, 2021
If I were Tesla and exhausted all other options for where to put the extra cash, I would put it into a fund like $JEPI or $NUSI and have cash flow come in from that. Tesla could always sell their positions if another opportunity they deemed better came along (like acquiring a company) – and would require enough buyers for the shares as well.
Tesla could buy other companies
Elon Musk tweeted recently that he wanted the Giga Berlin suppliers to please accelerate. He has less control over suppliers that are not a part of Tesla. To stop future tweets like this from happening, he could buy the companies that offer supplies and setup shop at his Giga factories. This would reduce time and put more things in control of Tesla.
This is the primary thing I think Tesla should do with their extra cash. They should buy companies that are suppliers for them – for parts or minerals, and create a division within Tesla to handle that. This will reduce the supply chain times and give Tesla more control.
Let’s rank what I think Tesla should do with their cash from top priority to bottom priority:
- Buy other companies that supply them parts and minerals
- Buy a short-term bond fund like $JPST or $VUSFX
- Buy a high yielding fund like $JEPI or $NUSI
- Buy more cryptocurrency like Dogecoin, Ethereum, or Bitcoin
If they do just keep the cash on hand without spending or investing, they risk losing value to inflation. On the other hand, they don’t lose if an investment goes badly either.
What do you think Tesla should do with all this extra cash? Should they buy any of these mentioned assets, buy companies, or just keep the cash on hand? What about another idea not mentioned here?
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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter, Facebook, LinkedIn and Instagram to stay in touch and follow his Tesla news coverage on Torque News.