Many of you are former coworkers who are fans of the Question of the Week, which I wrote at Markit Digital from 2018-2022. So, you know that I have fun writing about Elon. And there’s so much to write about him now!
I’ll tell you though, I think we’re beyond peak Elon. We’re exhausted by Elon.
Before I get into why I think so, let’s start with a quick question:
How much would you sell your car for today (Sunday) if you had a guaranteed offer from a billionaire to buy it for $20,000 on Tuesday?
Would you sell it for less than $20,000 today?
What if you didn’t really trust the billionaire?
See where I’m going with this?
Normally, when a publicly traded company is being acquired, the stock price of that public company will trade very closely to the acquisition price.
If the stock trades above the acquisition price, it’s because investors think that another company may make a higher offer. If the stock trades well below the acquisition price, it’s because investors are skeptical that the deal will complete. In other words, the price is based on the risk that a deal fails to be completed.
When investors have great confidence in the deal, the stock will trade at a slight discount to the deal price. Some investors would rather take the money now and buy something else.
If a deal trades at too big a discount to the acquisition price, smart traders will jump in and buy shares. If a trader has a chance to make a low risk 1% on their investment in a couple of days, they’ll do it. After all, the average monthly return on the S&P 500 is less than 1%. A 1% gain is a big deal to a trader.
So, why did Twitter close at $53.70 on Friday? That’s about 1% below Elon’s guaranteed deal closing price on Tuesday. $54.20! Funding secured!
Smart traders could make a guaranteed 1% on their money. But, they don’t want it.
Why? Risk.
Wall Street is exhausted by Elon. They don’t trust him. Why should they? He’s tried to break this deal many times. They’re worried that he could call it off over the weekend and that Twitter would have to sue him again. After he’s decimated their workforce, no less.
It’s not just Twitter. Tesla is also down more than 50% since Elon started selling stock earlier this year. Selling of Twitter shares picked up as investors grew concerned that Elon would have to sell more shares to buy Twitter.
And you should care about Tesla because it’s one of the largest companies in the S&P 500 index. When its shares fall, your 401k probably does, too. When Elon creates uncertainty, your portfolio may suffer.
Tesla is also lower because it was overvalued. Earlier this year, investors were willing to pay $400 for every $1 of Tesla’s earnings. That’s because the company looked to be on an enormous growth trajectory. Now, investors are willing to pay “just” $64 for each $1 of earnings. Experienced investors will understand that I’m talking about the company’s PE ratio. And, while a PE of 64 is still about 3x what is normal, it indicates a loss of faith by investors.
Yes, I know that Tesla is down because the market is lower. Inflation, Ukraine, etc… But, if Tesla had been undervalued at the start of 2022, it’s price wouldn’t be lower.
Oh! Let’s not forget competition for Tesla. Audi’s EVs are all over Boulder. You can’t turn a corner without spotting a Rivian. Ford’s Mach E is a great alternative to the Model 3, too. And Ford’s Lightning not only beat the Cybertruck to market, but it will also appeal to truck buyers in middle America and open a new market to EVs.
Tesla hasn’t introduced a new model since the 3, back in 2018. I love our 3 (almost as much as my wife does!) but most cars get a design refresh every 4 years. I have no reason to buy another one. (Which is OK. We Americans buy too much stuff as it is.)
Tesla gets credit for creating the market. They’re no longer the innovator. That’s why S&P removed them from the ESG S&P 500.
Elon has done lots of good. We can’t forget that. But, his actions of late are unpredictable and people are exhausted.
Here’s a chart of Twitter, showing the ups and downs throughout 2022 as investors said, “will he or won’t he?”
And here’s one of Tesla that includes the PE ratio.
#ExhaustedByElon
Drop me a line if you have any questions!
Jason
I should have provided attribute to the pig. I love that pig and found it at an art store in Denver. Can't remember which and I didn't see an artist's signature. Apologies.
Oh, and I'm not comparing Elon to a pig. I just think the party's over. Sorry.