I was told there would be no math. I love that expression, but in the stock market it is irrelevant. However, there are still a few of us nerds willing and able to run the numbers.
So, it occurred to me that Elon Musk has created a fascinating economic puzzle with his bid for the 90% of Twitter (TWTR) he does not currently own. Published news stories and Musk's own tweets have indicated that Tesla (TSLA) is his main source of wealth, but Tesla has never paid a dividend, and likely never will.
Musk is asset rich, but cash-flow poor. If Elon, who also claimed to be selling all his homes, really does own nothing but TSLA shares, then he would have to sell Tesla to buy Twitter. That's an oversimplification, I am sure, but it hints to the existential problem. Musk's asset is worth less every time he sells a chunk (as he did in December after exercising options which were struck at about $6 per share.) No one wants to see a CEO selling shares of his own company, and the extra shares that would hit the market amount to extra volume that needs to be absorbed by the market, or what we stock nerds refer to as an overhang.
So, based on Thursday's closing price of $985/share, Elon would have to sell 39.97 million shares of TSLA to raise the amount needed to fully acquire Twitter's outstanding shares. Purchasing the 725 million shares of TWTR that he doesn't currently own -- 799.4 million total shares outstanding as of 12/31 minus the 73.1 million TWTR stake that Musk disclosed in his most recent SEC filing -- at a price of $54.20 per share would require $39.4 billion.
Here's the thing, though. Tesla and Twitter are Big Tech, and Big Tech is getting hammered by rising interest rates. The 10-year U.S. Treasury Note is yielding 2.83% as of this writing, up 69 basis points in the past month and 120 basis points in the past year.
Unless you are delusional, you cannot ride Big Tech as a stable portion of your portfolio in such an environment. The discount rates for future innovation are increased, the availability of free money is decreased, and it is just a general tightening of financing conditions. This is caused by Jerome Powell and Janet Yellen's extraordinary policy error in not only failing to fight inflation but actually denying that it even existed -- or was not just "transitory" -- for months after the data revealed a 40-year-high in the rate of increase of prices of just about everything.
The macro rules the micro in investing. For Big Tech, the macro is horrible right now. So, this could become a vicious cycle for Musk. Tesla is already extremely vulnerable to downward earnings revisions as its Lingang facility in China has been closed for 18 days, with no reopening date yet to be unveiled. Local authorities in Shanghai are not kidding around with the zero-Covid policy.
What if TSLA shares continue to fall? Well that means Elon would have to sell even more of them to meet his commitment to purchase Twitter for $54.20 per share.
In addition to the snarky marijuana-culture reference contained in it, $54.20 is just a ridiculous valuation for Twitter's assets. There is no there there at Twitter. Elon is (unwisely, in my opinion) building an empire at Tesla with two new plants being opened this year (Austin, Texas and Gruenheide, Germany) and an employee count that was detailed at a staggering 99,920 in Tesla's 2021 10-K filing. At least he's trying to build something, though.
In contrast, Twitter does nothing. Looking into Twitter's financials is like staring into a black hole. Twitter owns nothing but a website and an app. Twitter's headquarters building in San Francisco that -- as Elon so eloquently noted should be instead used as a homeless shelter -- is actually leased.
This is a bad deal. Prince Alwaleed's tweet Thursday was a signal that Twitter's board will reject Musk's offer as "too low." However, anyone with access to a calculator would tell you that $54.20 is a ridiculous valuation for a company that is forecast to lose $0.08/share this year, according to Wall Street consensus estimates, and then to throw off a massive profit of $0.18/share in 2023. Only a guy who runs a company that currently trades at a 126.1x P/E on the 2022 consensus EPS estimate for $7.81 (which is way too high in light of the Tesla Shanghai shutdown) would fail to see that.
Bubbles make strange bedfellows.