Margin calls? Fire sales? Why Elon’s Twitter outburst could crash TSLA stock.

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You’re here (NASDAQ:TSLA) Stocks were rocked this week after CEO Elon Musk revealed he had sold $3.95 billion of his Tesla stake. Many analysts immediately drew lines between the rapid-fire layout and from Twitter recent stumbles. It took just three months for the world’s richest man to backtrack on his promise to avoid “emergency” sales of TSLA stock.

At first glance, Twitter’s influence on Musk’s actions seems odd. Why would a man worth $200 billion…who owns a company worth over $600 billion…would care about a company that supposedly only loses $4 million a day? For an average person with $200,000 saved (or one millionth of an Elon), this amounts to $4 in daily expenses.

But like a good Shakespearean plot, the fortunes of Twitter and Tesla are now inextricably linked. And as Musk takes increasingly drastic measures to cement the fortunes of the social media platform, it becomes clear:

As Twitter’s troubles mount, so does the risk of a Tesla stock market crash.

Why Elon Musk’s Twitter saga could cost Tesla dearly

Like any epic drama, the Twitter-Tesla story unfolds in three acts.

1. The configuration: the Twitter LBO

To fund the fourth leveraged buyout (LBO) in the story, Elon Musk had to come up with around $42 billion in cash to pay for shares of Twitter he didn’t already own.

There was, however, a slight problem. Elon Musk’s $200 billion fortune is tied to Tesla, SpaceX and Boring business Stock.

According Bloomberg’s Billionaire Index, Musk only had about $17.8 billion in cash at the time Twitter closed, including $6.9 billion from a recent sale of TSLA stock.

This presented a simple mathematical problem. Supposing Bloomberg’s assumptions are correct, Musk still needed more than $24 billion to close the deal. (Later why he didn’t just sell TSLA stock to make up all the difference).

For $7.1 billion, Musk turned to a consortium of equity investors, including $1.9 billion from Saudi Prince Alwaleed bin Talal Al Saud and $700 million from the Dubai-based company. VyCapital. These investments are now the target of a potential Committee on Foreign Investment in the United States (CFIUS) investigation. In addition, another $13 billion was financed by loans from a consortium of banks led by Morgan Stanley (NYSE:MRS).

That left $4.6 billion to fund. And that’s where Tesla comes in.

2. The mystery: how Tesla got involved

To magically earn $4.6 billion, Elon Musk reportedly turned to his Tesla shares as a source of collateral. According to the electric vehicle (EV) maker’s latest proxy document, Musk has pledged about half of his stake – 268 million shares – of which he can raise up to 25% of their market value in the form of loans (or approximately $10.3 billion at current prices). It’s an easy source of cash in good times and fills its funding gap with plenty of headroom. Bloomberg’s Billionaire Index also agrees on $4.6 billion as the value of Tesla shares currently pledged.

But as all options investors know, the market value of a portfolio is at best a temporary safety. Today, every 10% drop in TSLA shares means more than $1 billion in cash is wiped from Musk’s credit facility. An additional $6.4 billion liability with pledged SpaceX stock adds to that risk. If the value of Musk’s holdings goes down, so does his ability to keep Twitter’s funding afloat.

These problems are compounded by the terms of Twitter’s $13 billion bank financing, which came with change of control protections. Under their terms, Elon Musk cannot sell his majority stake without potentially triggering a clause that forces Twitter to offer to buy back all tickets at 101% of face value — a ruinous amount that would immediately sink the company. Debt also limits Musk’s ability to raise additional secured capital; future rounds will involve unsecured junk bonds with strict financial covenants. In other words, Elon Musk can’t walk away from Twitter unless he takes care of the $13 billion debt first.

3. The catch: why Tesla stock is now under threat

Finally, this brings us to the risks associated with Tesla’s valuation.

Currently, Tesla’s voting rules require a two-thirds majority for any corporate action to pass, rather than the usual 50%. That gives Musk’s 25% stake an outsized say. To override his voting block, nearly 90% of outside shareholders must oppose him — a hurdle that has proven too high in the past to challenge the CEO’s unusually generous compensation packages.

However, supermajority voting is fragile. In 2019, 99% of outside investors voted in favor of removing the threshold; the vote failed only because too few investors took part in the referendum. And for every 1% stake Musk sells today, the number of investors who must oppose (or abstain) him is reduced by 1.2%. Sell ​​too much TSLA stock and Musk risks losing control of his crown jewel, just as his rivals catch up.

This would have disastrous effects on Tesla’s premium valuation. TSLA shares are currently trading at around 33 times 2024 earnings and 22 times 2024 EV/EBITDA – a factor often attributed to the company’s “quirky, meme-loving tycoon” who has “inspired legions of evangelists and investors loyal to Tesla”. Musk’s friendly relationship with the Chinese government has also helped his electric vehicle business generate unusually large profits there.

If you lose those factors, Tesla shares are worth closer to $120, according to a 3-step DCF (discounted cash flow) model.

The markets already seem very aware of these risks. News on Twitter seems to magically appear on the TSLA stock chart. As the issues pile up on the social media platform, the trend is only going to get stronger.

TSLA Stock Price Chart vs Twitter News

For a penny, for a pound

Elon Musk’s problems are compounded by Twitter’s growing responsibilities.

His social media business now consumes about $1 billion in interest payments, $853 million in cash (assuming 12-month rates) and could potentially lose another $1.6 billion if ad revenue drops by 30% as advertisers flee the platform. In total, Elon’s $4.6 billion debt venture could grow by $3.5 billion or more a year – a rate that would force the business mogul to sell an additional 4 million Tesla shares per quarter.

Twitter is also becoming a legal risk. This week, Chief Information Security Officer Lea Kissner and Chief Compliance Officer Marianne Fogarty resigned from the beleaguered company as did the Federal Trade Commission (FTC) notices of compliance expire. The company now faces billions in fines if it “as much as sneezes” without doing a confidentiality review first.

“I anticipate you will all be pressured by management to make changes that will likely lead to major incidents,” a Twitter attorney wrote in an internal post, as reported by The edge.

That means the tail ($44 billion Twitter) is now wagging the dog ($600 billion Tesla). Elon Musk’s problem isn’t a daily cash burn rate of $4 million. It’s $13 billion in liabilities, $3.5 billion in potential annual cash burn on Twitter, potential billions in legal fines, and no easy way out.

The finale: Could Twitter and Tesla still win?

Elon Musk has surprised skeptics in the past. Writers at The Economist Remark:

“His detractors must accept that the my way or highway approach has worked before […] At his other ventures, like Tesla and SpaceX, Mr. Musk may not have shown empathy, but provided a planet-wide goal, from popularizing electric vehicles to colonizing Mars. .

Musk’s blunt approach to reforming Twitter could still work. MBA professors have also long touted the benefits of having strong leaders, especially those who are catalysts for change. Musk roughly ticks those boxes, no matter how unconventional his management style might seem.

This means that the richest man in the world could still transform Twitter. The social media company largely stagnated under its previous leadership and could use a punch in the arm. Musk’s wealth also covers Twitter’s debt burden at least 10 times.

Musk also has stakes in SpaceX and the Boring Company worth about $43 billion. Although an unattractive option, he could potentially sell those assets to raise cash to keep his stake in Tesla intact.

But Musk’s strategy still carries big risks. Studies by US research firm Strategic Vision found that 39% of car buyers now say they wouldn’t consider a Tesla. It’s a product of Musk’s divisive approach. Recently, MIT researchers also concluded that Twitter may have lost over a million users since Elon Musk took over. The social media platform has since posted opposing numbers.

The future of Twitter remains to be written. His drama, however, is already sinking TSLA stock.

As of the date of publication, Tom Yeung did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Tom Yeung is a market analyst and portfolio manager of Omnia Portfolio, InvestorPlace’s highest subscription. He is the former editor of Tom Yeung’s Profit & Protection, a free e-newsletter about investing for making profit in good times and protecting gains in bad times.

Sallie R. Loera