Is Tesla’s $ 1.5 Billion Bitcoin Good Corporate Finance? Experts intervene

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Tesla Inc. on Monday said it bought $ 1.5 billion worth of bitcoin, a purchase that comes after CEO Elon Musk promoted the world’s No.1 digital asset, along with other cryptos, these last weeks.

The price of Bitcoin BTCUSD,
-3.61%,
already on a stratospheric climb, got an additional boost from the ad, with just one bitcoin changing hands on Monday at $ 42,709, up more than 9%. Prices hit a record high of nearly $ 45,000

But one of the key questions surrounding the decision of the electric vehicle maker is whether the decision, including the decision to eventually allow its products to be sold in bitcoin, is a prudent use of capital. This is a particularly important question given the wild swings that Tesla’s two stocks TSLA,
+ 2.52%
and bitcoin are prone to it, even though these assets have both seen almost uninterrupted growth.

“I think this is a terrible strategy on many levels,” said Christopher Schwarz, associate professor of finance and faculty director at the Center for Investment and Wealth Management at the University of California at Irvine, in comments sent by e-mail.

“In essence, it’s like creating [currency] risk since none of Tesla’s suppliers are paid in bitcoin, ”Schwarz told MarketWatch.

An email to the company for comment was not immediately returned.

Musk’s moves come as Tesla focuses on ramping up production of electric vehicles, with its share price rising, but the automaker remains a niche player despite its market value of over $ 800 billion .

Tesla shares have risen 472% in the past 12 months, making it one of the few mainstream stocks to outperform bitcoin’s 337% gain over the same period.

The Wall Street Journal noted that Tesla took advantage of its rabid investor base and rising stock prices to bolster its cash position, taking its cash position to around $ 19.4 billion by the end of the year. last year, up from around $ 6.3 billion at the end of 2019.

This means that its current bitcoin allocation is roughly 8% of its cash.

“Tesla’s purchase of bitcoin is an unusual use of the company’s cash, which is typically held in more secure and less volatile assets, such as short-term fixed income securities to ensure liquidity and limit volatility. “, Jerry Klein, Managing Director and Partner at Treasury Partners. , based in New York, told MarketWatch via email.

“As Tesla shareholders react positively to the news, it remains to be seen how shareholders would respond if a drop in the price of bitcoin negatively affects Tesla’s future earnings,” Klein said. “CFOs are willing to accept risk across all of their businesses, but not with cash on their balance sheets. While bitcoin has increased in recent months, it has been very volatile in recent years, ”he said.

Granted, Tesla isn’t the first company, and probably won’t be the last, to attribute some of its holdings to bitcoin. MicroStrategy Inc. MSTR Software Company,
+1.85%
last year he acquired a few bitcoins and was a champion of other companies.

MicroStrategy, which recently hosted a virtual conference on the usefulness of bitcoin for businesses, estimates that around $ 50 billion worth of bitcoin is owned by private and publicly traded companies, citing data from BitcoinTreasuries.org.

MicroStrategy reported that approximately 8,200 people attended its weekend conference from nearly 7,000 companies.

Returning to Tesla, Joe Osha, Tesla analyst at JMP Securities, told MarketWatch in a telephone interview Monday afternoon that the electric vehicle maker is often portrayed as having problems with cash management, but believes it ‘this is a false assessment.

“I think there is this very outdated narrative around Tesla’s liquidity that no longer coalesces around its balance sheet or its generation of cash flow,” Osha said.

He argues that the company’s investment in bitcoin is insignificant compared to the scale of its ability to generate cash and aligns with the company’s strategy of being a disruptor.

“I see it as another step in Tesla’s effort to reinvent the way cars are sold and delivered to people,” said Osha, who refers to Tesla’s direct-to-customer sales model. Osha estimates that Tesla generated approximately $ 1.868 billion in free cash flow during the December quarter.

Chester Spatt, a professor at the Tepper School of Business at Carnegie Mellon University, told MarketWatch that bitcoin’s volatility makes it a difficult asset to use as a reserve asset for businesses or as a medium of exchange.

“You have about 10 times the volatility here of the euro,” said the professor, who was an economist and director of the Securities and Exchange Commission’s office of economic analysis from 2004 to 2007.

“This movement poses many challenges for a company to keep [bitcoin] on their balance sheet, but this also poses challenges from a consumer perspective, ”he said.

Tesla shares closed 1.3% higher on Monday.

Antoni Trenchev, co-founder and managing partner of Nexo, a crypto lender, said it might make sense for companies to put some of their “dry powder” in bitcoin, especially with interest rates close 0% and the US dollar under pressure. , as measured by the ICE US Dollar Index DXY,
-0.07%,
which is down almost 8% over the past year, according to FactSet data.

“Companies whose dry powder keeps growing have one more obvious cash management option: a partial allocation of BTC,” Trenchev told MarketWatch.

“Sitting on piles of cash offers little to no return and is constantly devalued by excessive quantitative easing measures from central banks. Having a treasury policy that diversifies risk and return, as well as pursuing “the fastest horse” is not only a wise policy, but also one that most adheres to the key principle of maximizing value. shareholder, ”he declared.

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