Is Tesla’s $1.5 billion bitcoin buy smart corporate finance? Experts weigh in

by Warrior2

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

Bitcoin’s price BTCUSD, +5.65%, already on a stratospheric rise, garnered an additional fillip from the announcement, with a single bitcoin changing hands on Monday at $42,709, up over 9%. Prices touched a record peak near $45,000

But one of the key questions swirling around the decision by the manufacturer of electric vehicles is whether the move, including the decision to eventually allow for the sale of its products to take place in bitcoins, is a prudent use of capital. It’s a question that’s particularly important given the wild swings that both shares of Tesla TSLA, 0.72% and bitcoin are prone to, even if those assets have both been on a nearly uninterrupted ride higher.

“I think this is awful strategy on many, many levels,” Christopher Schwarz, associate professor of finance and faculty director of the Center for Investment and Wealth Management at the University of California at Irvine in emailed comments.

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

An email to the company for comment wasn’t immediately returned.

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

Shares of Tesla are up an eye-popping 472% over the past 12 months, making it one of the few traditional stocks that have outperformed bitcoin’s gain of 337% over the same stretch,

The Wall Street Journal noted that Tesla has taken advantage of its rabid investor base and its share price rally to bolster its cash position, bringing its cash holdings to around $19.4 billion at the end of last year, up from around $6.3 billion at the end of 2019.

That means that its current bitcoin allocation represents about 8% of its cash holdings.

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“Tesla’s purchase of bitcoin is an unusual use of corporate cash, which is typically held in safer 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.

“While Tesla shareholders are reacting positively to the news, it remains to be seen how shareholders would react if a decline in bitcoin’s price negatively affects Tesla’s future earnings,” Klein said. “CFOs are willing to accept risk in their overall business, but not with the cash on their balance sheet. While bitcoin has been surging in recent months, it’s been very volatile over the past few years,” he said.

To be sure, Tesla isn’t the first company, and isn’t likely to be the last, to apportion some share of holdings to bitcoin. Software company MicroStrategy Inc. MSTR, 3.75% last year acquired somce bitcoin and has been a champion of other corporations do so.

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

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

Back to Tesla, Joe Osha, a Tesla analyst at JMP Securities told MarketWatch in a Monday afternoon phone interview that the electric-vehicle maker is often framed as having cash management troubles but believes that that is a bogus assesment.

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

He makes the case that the companies investment in bitcoin is trivial against the scale of its ability to generate cash, and aligns with the company’s strategy of being a disrupter.

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

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

“You have volatility here that’s about 10 times that of the euro ,” the professor, who served as economist and director of the Securities and Exchange Commission’s Office of Economic Analysis from 2004-07 , said.

“That movement poses a lot of challenges for a corporation to hold [bitcoin] on their balance sheet but it also poses challenges from the point of the consumer,” he said.  

Shares of Tesla closed up 1.3% on Monday.

Antoni Trenchev, co-founder and managing partner of Nexo, a crypto lender, said that it may make some sense for corporations to put some of their “dry powder” in bitcoin, especially with interest rates near 0% and the U.S. dollar under pressure, as measured by the ICE U.S. Dollar Index DXY, 0.09%, which is down nearly 8% over the past year, FactSet data show.

“Corporations with ever increasing dry powder have a most obvious cash management option: partial BTC allocation,” Trenchev told MarketWatch.

“Sitting on piles of cash offers little to no return and gets constantly devalued by central banks’ excessive QE measures. Having a treasury policy that diversifies risk and returns, as well as looking into ‘the fastest horse’, is not only a sound policy but is also the one that most adheres to the key principle of maximizing shareholder value,” he said.

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