Thursday, February 11, 2021

"You knew this day was coming"

The already complicated accounting and business logic of Tesla is about to get even weirder.

From Grant in the WSJ:

Tesla Buys $1.5 Billion in Bitcoin: What Could Possibly Go Wrong?

GameStop mania was a wake-up call, but now the capital markets have truly reached ludicrous mode.

Electric-car maker Tesla said in a securities filing Monday that it has purchased $1.5 billion worth of bitcoin and that it expects to begin accepting payment in the cryptocurrency for its products in the future. Tesla shares and bitcoin both traded higher after the announcement. This follows social media posts by the auto maker’s influential boss, Elon Musk, that already had helped drive bitcoin’s price to a record. The announcement added roughly $100 billion to the combined market value of bitcoin and Tesla on Monday.

The investment is more than symbolic for the company, being equivalent to Tesla’s research-and-development tab for 2020. And while uniting two of the most popular investment themes under one roof is undoubtedly a winner today, the decision introduces even more risk to owning what is already one of the most speculative stocks of the current bull market.

As Tesla itself said in the filing, prices for digital assets such as bitcoin have been volatile in the past. Cryptocurrencies are a fairly recent development and their long-term adoption by consumers, investors and businesses is highly uncertain. That adds to the speculative fervor already gripping Tesla’s stock price in a feedback loop. Indeed, the manager of the most popular active fund recently, Cathie Wood of ARK Invest, has made big bets on both Tesla and a trust that owns bitcoin, fueling a record pace of inflows.

At a market value of about $800 billion, Tesla trades at about 6.5 times the combined value of Ford and General Motors , despite controlling a small fraction of the global auto market. And Tesla lately has been losing market share in Western Europe to competitors including Volkswagen , which has begun to compete aggressively in the electric category. The news of Tesla’s bitcoin investment eclipsed a negative headline for the company Monday about quality issues identified in the important Chinese market.

Here's Mitchell:

Beyond financial considerations, there’s the question of how promoting and profiting from Bitcoin squares with Tesla’s stated mission, the advancement of sustainable energy, given the enormous amounts of electricity required to support the computing power involved.

A study published by science journal Joule said cryptocurrency computers pumped about 23 megatons of carbon dioxide into the atmosphere in 2018. Much of that is due to so-called cryptocurrency mining, in which massive banks of computers are used to solve the math equations that yield new coins. That’s attracted miners worldwide, many in regions mainly dependent on coal for electricity, although Iceland, where electricity is generated by cheap, clean hydropower, has become a center for cryptocurrency mining.

Those crypto-emissions are equivalent to the CO2 spewed by well over 4 million gas-powered cars each year. (According to U.S. government statistics, a typical internal combustion passenger vehicle emits 4.6 metric tons per year.)

The environmental issues sparked some backlash on Twitter. “Are ESG funds still able to invest ... after this?” said Harper Reed, an entrepreneur who helped Barack Obama win the presidency as the campaign’s chief technology officer. ESG stands for environmental, social and corporate governance, a hot new category for mutual fund and exchange traded fund investing.

And Hiltzik

Tesla’s Bitcoin announcement happened to coincide with a couple of doses of bad news for the company.

One was a Feb. 6 report in the Global Times, an English-language publication of the Chinese Communist Party, that the Chinese government had upbraided Tesla for lapses in quality control and consumer relations in China. That’s a concern because Tesla has enjoyed a very favorable relationship with the Chinese government, so far.

“Tesla has shown respect for the potential of the Chinese market, but not the same level of respect is given to Chinese consumers,” the publication reported, citing “analysts.”

The second was a report from German sources that the company’s German car and battery factories were facing months of construction delays, as well as reduced government subsidies for the battery plant.

Jamie Powell writing for FTAlphaville:

    The only certainty here, however, is that it will make Tesla’s GAAP profits, both pre- and post-tax, even further detached from reality than they were before. FT Alphaville notes that the company’s bottom line has been heavily distorted by the pure profit zero emission credits it sells to other auto companies, and wild swings in the price of bitcoin are only going to make unpicking the accounting reality from the headline numbers even harder. Particularly if the company does realise any gains from selling bitcoin to offset losses from its core business lines. A decision that could be taken by the company once it’s clear how a quarter’s numbers are going to pan out.

FT Alphaville isn’t sure what to make of this episode bar the fact its yet another distraction from Tesla’s ongoing struggle to make its core automotive business consistently profitable.

But then again, perhaps that’s the entire point.

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