The Probability of Tesla Going Bankrupt

Never take advice from someone who doesn’t have to live with the consequences. With all the other media talking about Tesla (TSLA) exploding, that’s precisely why it’s worth taking a closer look at the value on offer. Properly assessing the risks associated with a stock requires that ethnocentric political beliefs and the propensity to engage in petty disputes be left at the door. Successful investors are opportunists who look beyond all the noise and excitement to find deep value in places others are afraid to look. And in today’s bear market, surviving is just as important as thriving.

Pointing to Tesla’s share price decline without including a benchmark is a rookie move. Here’s Tesla’s annual performance using various benchmarks.

  • Nasdaq Tracker ETF: -32%
  • Google: -37%
  • Tesla: -57%
  • ARK Innovation ETF: -66%

Even considering that the ARK ETF has a 7.5% weighting in Tesla, it’s still a bearish basket of tech stocks. -66% year to date To say Tesla’s stock is falling seems like an overreaction, especially when you consider its high beta. A higher beta stock is expected to move more dramatically than the benchmark. When stocks were going to the moon, nobody had a problem with high beta. But when they see the same downward moves, suddenly the world is ending. With its largest owner selling shares, pressure on Tesla’s stock price should be expected.

Investors in Tesla stock, or potential investors, should be pleased that a quality asset is for sale. The only concern is Tesla’s survival in the face of a falling stock price, regardless of the reasons for the fall. Let’s take a look at how Tesla makes its money and where it comes from.

What does Tesla do?

We have always refrained from writing about Tesla because the last thing this world needs is another Tesla opinion. As with many fanboy actions, insiders often have an incredibly rich understanding of very granular aspects of the business, making it very difficult to find a simple explanation for how Tesla makes its money. We’ll use its latest 10-Q as the basis for today’s analysis.

Credit: 10-Q

The sale of electric vehicles constitutes 95% of the company’s revenue, of which exactly half comes from the United States. Americans who manufacture outrage for a living may not be buying Tesla vehicles, while actively attacking the brand as much as possible, so there may be some drop in demand in the US, where half of Tesla’s revenue comes from. Since we are in a recession, let’s assume there is a fall in demand and income growth slows. The same is true of China, where demand is said to be slowing and competition is tightening. Given these assumptions, what problems could Tesla run into that would force them to raise money by issuing very cheap equity or taking on debt?

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thinking about it

Although Mr. Musk spends significant time with Tesla and is very active in our management, he does not devote his full time and attention to Tesla. Mr. Musk also currently serves as CEO and CTO of Space Exploration Technologies Corp.

Credit: Tesla 10-Q

A valid concern raised by numerous people around the attention Elon Musk has been giving to his latest company, Twitter, a company that we think has a high chance of surviving, and maybe even thriving. But honestly, Mr. Has Musk ever been without distractions? In fact, he is mentioned as a risk in the company’s filings with the SEC where they note that he serves as CEO and CTO of SpaceX. Then there are the perfume sales, the flamethrowers, the boring giant holes, the development of brain-computer interfaces and Zeus knows what else.

Credit: Business Today

Let’s say that Mr. Musk pulls an Any Winehouse and is no longer a variable in the Tesla equation. The stock would temporarily implode, the CEO would be replaced and life would go on. In fact, there’s a good argument to be made that Tesla should find a new CEO now that they’re firing on all four electric motors.

Experts may have a hard time separating Elon Musk’s actions from the day-to-day operations at Tesla. For example, there has been a lot of focus on Musk’s recent sale

It remains Tesla’s largest shareholder with a 13.4% stake, according to financial market data provider Refinitiv. Last month, Musk revealed he had sold 19.5 million Tesla shares worth $3.95 billion, just days after completing a $44 million acquisition of social media platform Twitter.

Credit: BBC

Let’s put this into context. The value of that sale represented only 5% of Mr. Musk at current prices. Having such a large percentage of your wealth tied up in the stock of a single company justifies even more sales. That will put downward pressure on the stock price.

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Mr. Musk is now playing a complex game of juggling his personal finances to reduce debt payments at Twitter, a company he owns 74% of. In considering Tesla, we need to separate the personal financial decisions of Mr. Musk of what is happening in the company. So what if Mr. Is Musk getting a margin call on all the Tesla stock he put up as collateral?

A Bloomberg article postulates that Mr. Musk is borrowing money at a loan-to-value ratio of 20%. That means the stock would have to sink much further before it’s in danger of a margin call. Such an event would likely trigger automatic sales of the stock in a normal brokerage account, but one would expect that at the institutional level, things would behave differently. Unloading a large number of shares puts a lot of downward pressure on the share price, so it is in the lender’s best interest to do so more slowly. The big question surrounds the impact on Tesla if Mr. Musk has personal finance problems. Leaving aside increased selling pressure on the stock price, it doesn’t appear to be much of a risk for Tesla if Mr. Musk go pear-shaped.

Our take on Tesla

Two and a half years ago, we wrote a piece titled Here’s why short sellers are shorting Tesla at which time the stock was trading at about $110 a share to one sto implement Valuation Rbrother (SVR) of 14.5. Four months before that, the stock was trading at $30, representing an SVR of 4. Today, the stock is trading at an SVR of 5.5.

  • $475 billion market cap / (3Q-2022 revenue X 4)
    475 / (4 * 21.45) = 5.5
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If the stock were trading at the same valuation as when the Rona temporarily wreaked havoc on Wall Street, then the stock would be trading at about $108 per share. So there’s certainly an opportunity for more downside, and the media frenzy surrounding Musk’s sinking barge of gold should be taken with a grain of salt.

We list Tesla in our catalog of tech stocks as a like, even though it’s too big a company to fit our disruptive tech investment strategy. Once a company gets to a certain size, above $100 billion, we start looking at cutting our earnings. Google was a company we invested in when it debuted with a market cap of $23 billion and eventually became one of the largest companies in the world (we got out of our position when they dived into politics and started hiring adventure cartoonists). We don’t have a dog in the Tesla race, but we know many of our readers and subscribers do. Tesla shares are flirting with historically low valuations, and the drop in stock price doesn’t diminish the likelihood that the company will survive anything the bear market throws at it. The likelihood of Tesla going bankrupt seems very low.

Conclusion

Almost half of our audience comes from abroad, which means they are watching with curious bewilderment what has become of American politics. Saying anything about Elon Musk now implies some political statement, so we need to separate the man from his biggest company, Tesla. He’s always been distracted from focusing on Tesla, whether it’s selling perfume and flamethrowers, drilling giant holes, reading the minds of monkeys, or firing reusable rockets into space. Is the added distraction of Twitter what finally breaks the camel’s back? Perhaps, but Tesla appears to be in good financial shape to weather the storms brewing in bluebird land or otherwise.

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