How Elon Musk Distorts Scrutiny With Bitcoin

Tesla (NASDAQ:TSLA) shares traded lower this week after the company reported a first-quarter earnings beat. The negative market reaction came after Tesla reported more profits from selling Bitcoin (CCC:BTC-USD) than selling automobiles.

A concept image showing Bitcoin (BTC) in a bubble.
Source: Shutterstock

I’m not one of those TSLAQ people on Twitter that believes Tesla is a total fraud.

However, I do believe Elon Musk will do anything he can argue is legal to drive Tesla’s share price higher and enhance his brand. Cryptocurrency is a perfect tool for someone like Musk to use to muddy Tesla’s finances and tweak its bottom line on a quarterly basis.

Tesla’s Bitcoin Trading

First, let’s take a look at the numbers. Tesla sent Wall Street abuzz when the company said it bought $1.5 billion in Bitcoin back in February. Yahoo Finance estimates Tesla’s average Bitcoin price was around $34,200.

This week, Tesla announced it sold about 10% of its Bitcoin holdings and made a $101 million profit in the first quarter. That same quarter, Tesla reported $439 million in GAAP net income. Tesla also reported $518 million in regulatory credit sales on the quarter.

By taking $439 million in net income and subtracting $101 million in Bitcoin trading and $518 million in regulatory credit sales, Tesla’s actual business of selling cars generated a $181 million net loss on the quarter.

By the way, it’s important to note that Tesla’s regulatory credit sales are expected to drop to $0 once competitors roll out their own electric vehicle models.

Tesla and Bitcoin: An Odd Pairing

Right from the get-go, I criticized Tesla’s involvement with cryptocurrency. Bitcoin mining emits 36.95 megatons of CO2 annually. That’s equal to the emissions of about 8 million ICE automobiles, according to the EPA. That total is more than the annual number of vehicles produced by Ford (NYSE:F) and General Motors (NYSE:GM) combined.

If Musk truly cared about the environment, rather than about being famous or making money, he would take a stand against Bitcoin.

So why is he involved with Bitcoin at all?

One great reason for Tesla to trade Bitcoin is because it generates so much online buzz, especially on social media. Musk is the master at controlling the online narrative. Any time a negative report comes out about Tesla quality issues or poor performance of its technology, Musk can simply tweet about Bitcoin or Dogecoin (CCC:DOGE-USD) and the negative headlines will subsequently be buried.

If Musk is an actual genius, I believe this understanding of modern-day marketing is his true genius. There’s nothing illegal about it, and I certainly don’t fault him for doing it. When Tesla first announced its Bitcoin investment in February, it coincided with quality control issues with Tesla cars in China.

Those issues are still ongoing. On Tuesday, the Chinese state-run Global Times made sure investors knew about it.

“Despite record earnings in Q1, Tesla’s sales in China are expected to drop sharply in the coming months due to a public relations crisis that has put the image of the otherwise popular brand at serious risk,” the Global Times tweeted.

A search for Tesla stock on Google that day produced all kinds of headlines about Tesla selling Bitcoin. There were virtually no headlines about quality issues in China. Like I said, genius.

Financial Flexibility

In addition to an on-demand distraction, I believe cryptocurrency gives Musk another tool to use to distort Tesla’s financials. This quarter, Tesla was in a position to sell Bitcoin for a profit and beef up its earnings. Each quarter will present a unique opportunity for Tesla to either buy or sell Bitcoin at a profit or loss. Those trades will either boost its overall numbers or give the company an excuse for missing targets.

I’ve repeatedly said Tesla stock is a story stock that is completely disconnected from the company’s business or its fundamentals. Excuses and distractions are particularly important for story stocks because they give believers a way to rationalize their stories.

Musk said Tesla sold Bitcoin to “prove liquidity of Bitcoin as an alternative to holding cash on balance sheet.”  That’s an absurd thing to say given Tesla never would have invested $1.5 billion in Bitcoin in the first place if it had concerns about its liquidity.

But Bitcoin investors shouldn’t for a second think Tesla bought Bitcoin because Musk believes in the long-term bull thesis. He sees Bitcoin and its followers as useful tools to manage public online perception of Tesla and its finances.

On the date of publication, Wayne Duggan held a long position in GM.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.

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