Tesla (NASDAQ:TSLA) stock has already declined 38% in 2022, but news of Elon Musk’s mission to acquire Twitter (NYSE:TWTR) could further accelerate its downtrend.
For Musk, acquiring a company with a $30 billion market capitalization meant securing multiple sources of funding. He procured $7 billion from different entities including venture capital firm Andreessen Horowitz and tech mogul Larry Ellison. Crypto exchange Binance committed $500 million in equity funding. He also raised $12.5 billion through a margin loan, borrowed against his TSLA stock holdings. Musk backed two-thirds of the total amount with his personal assets, including the margin loan. This was unprecedented and didn’t do much to reassure investors. As Insider reported, “It is unheard of for an individual, even a billionaire, to get a $12.5 billion margin loan.”
TSLA stock began declining after the deal’s announcement and investor confidence has fallen along with it. As Musk is Tesla’s biggest shareholder, these declines compromised his ability to borrow against his personal holdings. He opted to abandon the loan and personally contribute more equity, specifically $6.25 billion, to cover more of the cost.
This news hasn’t slowed TSLA stock’s drop. Robert Ross, founder of tik.stocks and author of A Beginner’s Guide to High-Risk, High-Reward Investing, isn’t optimistic about Tesla’s future. As he sees it, Tesla investors don’t want Musk to have the distraction of running an entirely different company.
“Elon is making a good decision to avoid using margin to back his loan to buy Twitter,” Ross told InvestorPlace. “However, as we’ve seen with Tesla’s stock price which is down [36%] since the deal was announced, investors are not happy by the unnecessary distraction that’s come about by this acquisition. As long as this distraction remains, I’ll remain bearish on Tesla’s stock.”
One Leader, Five Companies
Ross is far from the only expert to notice that TSLA investors don’t approve of Musk’s Twitter ambitions. Since Musk submitted his offer to buy the company, multiple analysts have slashed their price targets. Experts such as Philippe Houchois of Jefferies have cited Musk’s unpredictable nature as a reason for their bearish takes. His taking the reins of an entirely new company would likely strengthen their arguments.
Even now, Tesla isn’t Musk’s only responsibility. With or without Twitter, his leadership roles include SpaceX, The Boring Company and Neuralink, three companies with new projects in development. In 2021, he told podcast host Joe Rogan that he’s normally in meetings “until 1 or 2 in the morning.” Musk added that he tried to sleep less than six hours per night but his “total productivity decreases.”
Experts are worried that Musk attempting to operate both Tesla and Twitter would render him unable to scale the profitability of either. According to John Engle, president of Almington Capital, Tesla shareholders are right to be concerned.
This prospect may explain some of Tesla’s recent weakness, as investors worry about whether Musk will be able to give Tesla the attention it needs. This fear is not unwarranted, since Tesla has increasingly become a party of one. Musk is in many ways the only visible personality at Tesla engaged in the technological and innovation-focused aspects of the business.
As evidence of this, Tesla has seen some of its most high-profile engineers depart the company in recent years. This has left Musk as the sole face of the company. Twitter would certainly divert his attention at a time when Tesla needs to focus on increasing production and delivering new products. The Cybertruck and Tesla Roadster are set for release in 2023. Further delays could compromise investor confidence, pushing shares down as a result.
Will Musk Sell More Shares?
Experts are also worried that Musk could sell more TSLA stock to help finance the deal. The CEO already sold $8.4 billion in late April. As Engle sees it, Musk could be facing severe pressure to sell in order to close the deal.
“If Musk plans to commit more equity capital to the deal, it will mean selling more Tesla shares,” Engle said. “Last time he unloaded blocks of stock, TSLA took a nasty tumble. Given the amount he needs to close the Twitter deal, we might see similar selling pressure.”
Lyle Solomon, a principal attorney at Oak View Law Group, has echoed Engle’s concerns. As he puts it, “The steps taken by Musk show that he has become aware of the risks associated with the TSLA-backed margin loans for the purchase of Twitter, considering the rapid fall in the price of TSLA and the risks of a margin call.”
While Solomon sees abandoning the margin loan as a safer way for Musk to approach the deal, he also has concerns regarding further share liquidation. “If Musk ends up liquidating more TSLA shares to fund the $6.25 billion in equity, it will trigger significant market selling for TSLA stock,” Solomon said.
Investors will likely remember when Musk began liquidating stock in November 2021. He ultimately sold more than $16 billion worth of stock in 2021. When Musk liquidated an additional $8.4 billion in TSLA stock to help finance the Twitter takeover, shares dipped. While he has said he does not plan on selling any more, it is difficult to take him at his word given his unpredictable nature. In late 2021, Musk began selling as the result of a Twitter poll.
Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock.
Do you support this?
— Elon Musk (@elonmusk) November 6, 2021
For Musk, securing further equity could easily come in the form of selling more TSLA stock. And as TSLA is currently trading below $700, he might have to offload a sizable chunk.
“Tesla enthusiasts should keep a keen eye on these developments and see how Musk is planning to complete the equity financing, as it may have a significant impact on the price of TSLA,” Solomon said.
What Comes Next for TSLA Stock?
While Wall Street waits for news of Musk’s Twitter deal, it’s hard to ignore the overwhelming expert consensus. Musk taking over Twitter will not be good for Tesla.
Between his perceived inability to run five companies and the prospect of further share liquidation, it’s easy to see why experts are increasingly bearish on TSLA stock.
Yesterday, Musk hosted a virtual town hall with Twitter’s workforce. Axios reported that Musk arrived 10 minutes late and told the crowd they would have to work in the office. He did not discuss potential layoffs or the closing of the deal. The Twitter town hall doesn’t seem to have restored anyone’s confidence that Musk taking over will go well for either company, given TSLA stock’s 9% drop.
The town hall does seem to suggest that the deal will move forward. But if Ross, Engle and Solomon are correct, this will mean an uncertain future in which TSLA stock may fall even more.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
