Trading up? Jakub Porzycki/NurPhoto by way of Getty Photos

In November 2021, Elon Musk launched a Twitter poll in November 2021 inquiring his 80 million followers no matter whether he need to promote 10 percent of his Tesla shares, about $20 billion well worth. At the time, Michael Burry, the hedge fund investor best recognised for predicting the 2008 monetary crisis and inspiring the bestseller The Significant Short, proposed the Tesla CEO was not offering his company’s shares for the reason that he needed hard cash to pay out tax bills like he claimed. Somewhat, Burry theorized, he just needed to reap some profit from Tesla stock although it was nevertheless investing at an absurdly significant valuation.

Could that be what he is undertaking with the acquisition of Twitter?

The Tesla CEO struck a deal with Twitter’s board on April 25 to purchase the social media business for $44 billion in cash. According to the funding approach Musk had laid out earlier, he will have to sell $21 billion worth of Tesla shares to fund the purchase. Assuming the offer really occurs (and there are uncertainties), he options to borrow the relaxation from investment financial institutions and set up additional Tesla shares as collateral.

That out-of-pocket portion is around 10 per cent of Musk’s possession in Tesla. In idea, he could have identified the cash elsewhere, these as his other highly useful company, SpaceX, approximated to be worthy of much more than $100 billion. (Musk owns 47 % of SpaceX, according to the company’s Federal Communications Commission disclosure.)

But Tesla is a a lot additional apparent choice, both of those due to the fact its shares are publicly traded and hence liquid and simply because Musk’s ownership is substantial.

Musk’s fortune is valued at $250 billion by Bloomberg. Virtually 85 p.c of that is tied to Tesla stock and options. The relaxation is spread throughout his stakes in SpaceX, The Dull Enterprise, Neuralink, Twitter, and other property, for each Bloomberg’s calculation.

Tesla stock is extremely overvalued as opposed to its friends

Nevertheless, Tesla stock is notoriously overvalued. Involving 2020 and 2021, its share selling price skyrocketed almost 14-fold without having proportionate earnings info to justify the surge. As of this 7 days, the electrical carmaker has a price tag-to-earnings (P/E) ratio of 136. P/E ratio measures a company’s present share price relative to its genuine earnings per share. The average P/E ratio of S&P 500 organizations is 16. Other automakers, Tesla’s peer team, have a tendency to have even reduced P/E ratios: Normal Motors’ present ratio is 6.4, and Ford’s is 3.4.

In the meantime, Twitter’s inventory selling price has barely transformed because the company’s buying and selling debut in 2013, and Musk thinks it has “great opportunity” to expand. So, from each a organization and expenditure perspective, it would seem a clever move to no cost up some dollars from an overvalued organization and place it into an undervalued 1.

In actuality, Musk experienced started diversifying his fortune absent from Tesla (with out shedding his controlling situation in the company) right before ever laying eyes on Twitter. In the final two months of 2021, he unloaded approximately $20 billion worth of Tesla shares. Right after spending a gigantic $11 billion tax bill similar to exercising stock choices, he allotted about $3 billion to obtaining 9.2 percent of Twitter, he disclosed on April 4.

It is no magic formula that even Musk himself thinks Tesla inventory is a bit overblown. “Tesla stock value is far too high [in my opinion],” he tweeted in May well 2020 after the carmaker’s share selling price soared on powerful quarterly effects. Seven months afterwards, Musk explained to Tesla workforce in an inside letter, “Investors are providing us a lot of credit rating for long run profitability. But if, at any point, they conclude which is not going to happen, our inventory will promptly get crushed like a soufflé below a sledgehammer!”

Tesla share price tag has approximately doubled because then.

Why Elon Musk’s Twitter Acquisition Is a Smart Investment and Not Just a Vanity Project