August 13, 2022

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Why Elon Musks Twitter Acquisition Is a Smart Investment and

In November 2021, Elon Musk launched a Twitter ballot in November 2021 asking his 80 million followers whether or not he ought to promote 10 % of his Tesla shares, about $20 billion price. On the time, Michael Burry, the hedge fund investor greatest identified for predicting the 2008 monetary disaster and provoking the bestseller The Huge Brief, steered the Tesla CEO wasn’t promoting his firm’s shares as a result of he wanted money to pay tax payments like he claimed. Fairly, Burry theorized, he simply needed to reap some revenue from Tesla inventory whereas it was nonetheless buying and selling at an absurdly excessive valuation.

May that be what he’s doing with the acquisition of Twitter?

The Tesla CEO struck a cope with Twitter’s board on April 25 to purchase the social media firm for $44 billion in money. In line with the financing plan Musk had laid out earlier, he should promote $21 billion price of Tesla shares to fund the acquisition. Assuming the deal truly occurs (and there are doubts), he plans to borrow the remainder from funding banks and put up extra Tesla shares as collateral.

That out-of-pocket portion is roughly 10 % of Musk’s possession in Tesla. In principle, he may have discovered the cash elsewhere, equivalent to his different extremely priceless firm, SpaceX, estimated to be price greater than $100 billion. (Musk owns 47 % of SpaceX, in line with the corporate’s Federal Communications Fee disclosure.)

However Tesla is a way more apparent selection, each as a result of its shares are publicly traded and subsequently liquid and since Musk’s possession is very large.

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Musk’s fortune is valued at $250 billion by Bloomberg. Almost 85 % of that’s tied to Tesla inventory and choices. The remainder is unfold throughout his stakes in SpaceX, The Boring Firm, Neuralink, Twitter, and different belongings, per Bloomberg’s calculation.

Tesla inventory is extremely overvalued in comparison with its friends

Nevertheless, Tesla inventory is notoriously overvalued. Between 2020 and 2021, its share value skyrocketed almost 14-fold with out proportionate earnings information to justify the surge. As of this week, the electrical carmaker has a price-to-earnings (P/E) ratio of 136. P/E ratio measures an organization’s present share value relative to its precise earnings per share. The common P/E ratio of S&P 500 firms is 16. Different automakers, Tesla’s peer group, are likely to have even decrease P/E ratios: Common Motors’ present ratio is 6.4, and Ford’s is 3.4.

In the meantime, Twitter’s inventory value has barely modified because the firm’s buying and selling debut in 2013, and Musk believes it has “large potential” to develop. So, from each a enterprise and funding perspective, it appears a sensible transfer to unlock some money from an overvalued firm and put it into an undervalued one.

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In truth, Musk had begun diversifying his fortune away from Tesla (with out shedding his controlling place within the firm) earlier than ever laying eyes on Twitter. Within the final two months of 2021, he unloaded roughly $20 billion price of Tesla shares. After paying a huge $11 billion tax invoice associated to exercising inventory choices, he allotted about $3 billion to purchasing 9.2 % of Twitter, he disclosed on April 4.

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It’s no secret that even Musk himself thinks Tesla inventory is a bit overblown. “Tesla inventory value is just too excessive [in my opinion],” he tweeted in Might 2020 after the carmaker’s share value soared on robust quarterly outcomes. Seven months later, Musk instructed Tesla staff in an inner letter, “Buyers are giving us a variety of credit score for future profitability. But when, at any level, they conclude that’s not going to occur, our inventory will instantly get crushed like a soufflé beneath a sledgehammer!”

Tesla share value has almost doubled since then.

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