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SINGAPORE: In February 2021, Elon Musk, Tesla’s chief executive, said the company had bought $ 1.5 billion worth of bitcoins.
He also announced that Tesla would start accepting bitcoin as a form of payment for its products soon.
Tesla has done nothing wrong by buying bitcoins. Maybe out of the ordinary. But not illegal. The thing is, Tesla had already updated investors on its revised investment policy a month earlier.
In its annual report last year, the company said that, in the future, investing in alternative reserve assets could give you more flexibility to further diversify and maximize returns on cash that are not required for day-to-day use.
However, Tesla’s revelation still drew attention, given that its bitcoin holdings grew to account for about one-eighth of the company’s $ 19 billion cash pile.
The question is whether the decision to put his faith in bitcoins is an investment masterstroke or whether Elon Musk has put Tesla shareholders at risk by risking the company’s funds.
READ: Comment: Amid Record Value, Tesla’s Bitcoin Bet Raises Uncomfortable Questions
The switch from cash to bitcoin draws attention as the cryptocurrency is volatile.
Janet Yellen weighed in on the alternative investment debate by calling bitcoins “highly speculative” and “inefficient” for the transaction.
Bill Gates said that if you have less money than Elon Musk, you should probably be careful.
Most of us have a lot less money than Elon Musk. After all, the inventor and entrepreneur has been among the two richest people in the world as of late, along with Amazon founder Jeff Bezos at the top.
DIVIDED OPINION
Despite the dizzying heights of his personal finances, opinion on Musk’s entrepreneurial endeavors is divided: He’s a creative genius, but can he translate those visions of the future into successful and profitable ventures?
After all, that’s what investors will be most interested in.
Tesla has invested $ 1.5 billion in bitcoin, a decision made just days after the electric car maker’s CEO Elon Musk changed his Twitter bio to simply say “#bitcoin.” (Photo: AFP / KAREN BLEIER)
Being a visionary, Musk clearly has it. You’ve probably done more to turn science fiction into science fact.
His company, SpaceX, has already made history by being the first private company to put a person into orbit and dock a manned spacecraft to the International Space Station.
It could make an even bigger name if it succeeded in sending the first crew to Mars by 2026 in line with its goal of eventually colonizing the Red Planet.
Even with Tesla, Musk has almost single-handedly transformed our perception of electric vehicles (EVs).
READ: Comment: Don’t be too quick to write off Elon Musk
Ever since electric cars were first conceived, one of the biggest hurdles has been concerns that the vehicle could run out of power during a trip.
LONG-RANGE PLANS
But Tesla has addressed the concerns of motorists. In a recent survey, Tesla cars have taken the top three spots in terms of how far they can travel on a single charge.
The Tesla Model S Long Range, Tesla Model 3 Long Range, and Tesla Model X Long Range have a range of between 314 miles and 379 miles.
This all sounds impressive. But when it comes to investors, has this translated into dollars and cents? That’s where Musk’s track record has sometimes been called into question.
Some of his business ventures, while making headlines, have not had similar financial success.
For 15 years, Tesla was unable to achieve profitability or positive cash flow, nor did Musk convert SolarCity’s glass solar roof tiles into a viable commercial product three years after acquiring the company.
FILE PHOTO: SolarCity vehicle shown in San Diego, California, USA, Nov. 2, 2016. REUTERS / Mike Blake / File Photo
Therefore, a tough test facing the company is sustainable profitability.
For one, while Tesla enjoyed the first-mover advantage by being a disruptor to the auto industry, others are catching up on its comparative advantages.
In terms of distance traveled on a single charge, the Jaguar i-Pace has a range of 292 miles, while electric vehicles from Kia, Hyundai, Mercedes-Benz, Audi, Nissan and BMW can travel between 193 miles and 292 miles with a single charge. post.
Tesla has to work hard to constantly stay ahead of the curve, as the rest are sniffing the distance behind.
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SUSTAINING TESLA’S EARNINGS
Although Tesla reported its first annual profit of $ 862 million in January compared to a loss of $ 775 million the previous year, there are worrying signs for investors.
On the surface, Tesla’s financial turnaround should be celebrated as it was due to improved sales and the introduction of the Model Y, which means that market demand for Tesla’s EVs is growing.
READ: Comment: Is Tesla’s share price justified? Probably not
The Model Y is Tesla’s second car to be made in China at its Gigafactory in Shanghai.
The Model Y launch reportedly hurt sales at another Shanghai automaker, Nio, after Tesla cut prices for its sport utility vehicle by 30 percent.
Tesla CEO Elon Musk speaks on stage during a delivery event for Tesla’s China-made Model 3 cars at its factory in Shanghai, China, on January 7, 2020 (Photo: REUTERS / Aly Song).
Worryingly, Tesla’s operating margin fell to 5.4 percent in the fourth quarter from 9.2 percent three months earlier. Tesla said this was due to price cuts and a $ 264 million share-based compensation to its CEO.
While turning a loss-making business is certainly a boost for its investors, Tesla makes less money than its rivals.
Germany’s BMW, for example, reported earnings of $ 2.08 billion in the third quarter of 2020. In other words, it earned more than twice as much in three months as Tesla in a full year.
In and of itself, that’s not a massive problem, as the EV market is still in its nascent stage compared to the gasoline or diesel car market that BMW is in.
READ: Comment: Electric Vehicles in Singapore – How Much is a Hype?
The worrying thing is that Tesla’s profits were boosted by the sale of carbon credits to other automakers.
Traditional car companies continue to depend on the sale of vehicles powered by polluting internal combustion engines.
But they can circumvent environmental regulations by buying carbon credits from companies like Tesla, which makes zero-emission vehicles.
Without the sale of carbon credits, which amounted to $ 1.58 billion last year, Tesla would have lost money.
That’s the bad new. The really bad news is that demand for carbon credits could decline as traditional automakers roll out more electric vehicles.
The International Energy Agency saw electric vehicle sales exceeding 2.1 million in 2019, surpassing the previous year’s record and expects the stock of electric vehicles to grow 30 times by 2030.
ALTERNATIVE SOURCES OF BENEFITS
That could pose a problem for Tesla. First, its already slim profit margin on car sales could be further reduced as rival automakers produce EVs at more competitive prices.
As discussed, with rival car makers becoming more emissions efficient, Tesla could have a harder time getting carbon credits and therefore making a profit.
READ: Comment: Giving up gasoline cars is much harder for parents
READ: Comment: Why I’ll probably never own a car, not even an eco-friendly one
But Musk provided insight into his thinking in July. He said: “We want to be slightly profitable and maximize growth and make cars as affordable as possible.”
He added: “So we have to not go bankrupt, obviously that’s important because that will fail in our mission.” Therefore, investors should expect Tesla not to chase big profits.
THE BITCOINS BET
But even maintaining modest levels of profit margins will take work. This is probably where bitcoins could help. Tesla could be betting on your investment in cryptocurrencies to provide you with an alternative source of income to the sale of carbon credits.
In this illustration, taken on February 9, 2021, renderings of the virtual currency Bitcoin are seen in front of the Tesla logo. REUTERS / Dado Ruvic / Illustration / File Photo
If Musk is right and the price of bitcoin appreciates, then profiting from Tesla’s stash of coin would assert his genius status.
If you’re wrong, you’ll still be a genius because you would have almost single-handedly pushed electric cars to the forefront of our private transportation mix.
Tesla may be profitable again. But he’s unlikely to go bankrupt as long as there are enough Musk fans to fund and back his next big deal.
READ: Comment: Bitcoin, the 12-year bubble that could eventually be worth nothing
READ: Comment: Is Dogecoin the next investment craze after GameStop?
When Tesla announced in February that it had bought the cryptocurrency worth $ 1.5 billion, bitcoin prices jumped almost 50 percent to a high of $ 57,000. In the same month, it plunged 17 percent after Musk commented that the prices of bitcoin and its rival ether “look high.”
However, Musk is no stranger to controversy. In May 2020, he said that Tesla’s stock price was “too high.” The shares fell 10 percent. Today, they are more than 300% taller.
Musk knows the value of public relations and the need to be front and center of the minds of the market, stakeholders and consumers.
One tweet from him could be all it takes to drive up bitcoin prices, which could provide Tesla with the resources to achieve Musk’s dreams.
(If nothing that happened with GameStop made sense to you, listen to the author of this comment break down how different players drove the increase and which listed company could see copycat attacks on CNA’s Heart of the Matter podcast 🙂
David Kuo is Co-Founder of The Smart Investor and previously CEO of Motley Fool Singapore.
