In a Feb. 20 note, Wedbush analyst Daniel Ives observed that Tesla’s gains on its controversial investment in Bitcoin probably exceed its profits from selling EVs and batteries for all of last year. Ives foresees great times ahead for Tesla, forecasting that its stock will reach $950 by year-end in the “base case,” and $1,250 in the “bull case,” jumps of 27% and 68%, respectively, from its price of $742 in late morning of Feb. 22. Ives states that the Bitcoin gambit marks “an initial good investment and one we expect could have a ripple impact for other public companies over the next 12 to 18 months.”
Many investors, however, fret that branching into cryptocurrency speculation will make the bumpy trajectory of Tesla’s earnings even bumpier and harder to predict going forward. That’s a problem, because to justify its $715 billion market cap, CEO Elon Musk needs to grow profits at a consistently gigantic rate for many years to come.
We don’t know precisely how much Tesla has made so far from its bet on Bitcoin. Ives’s estimate is “roughly $1 billion.” In its 10-K issued on Feb. 7, Tesla disclosed a January shift in its investment policies that favors parking excess cash in gold, cryptocurrencies, and other unconventional assets. It’s described as a stance “to further diversify and maximize our returns on cash.” The bombshell disclosure: Musk’s opening move was amassing $1.5 billion in Bitcoin. Musk’s endorsement sent Bitcoin on a spectacular rally; it jumped 21% by Feb. 7 and keeps hitting fresh peaks, reaching $53,584 at midday on Feb. 22.
It’s possible that Tesla bought Bitcoin in the opening days of February after its price started its big run, but more likely that all or almost all of its purchases came in January. That month, Bitcoin traded in an unusually narrow range. It started the year at $29,333, finished January at $33,087, and didn’t bounce much in between. So we can assume that Tesla’s average price is somewhere around the January midpoint of $31,210. If that’s the case, Tesla is sitting on “paper” gains of 72%, or $1.08 billion.
How does that six-week windfall compare with Tesla’s total profits for 2020? Last year, it booked $1.154 billion in pretax income. Hence, its Bitcoin bounty represents about two-thirds of all profits. But Tesla didn’t pocket any of those profits from its bedrock franchise of making and marketing cars and batteries, the platform that’s supposedly destined for a moonshot. No less than $1.580 billion flowed from the sale of regulatory credits, primarily to Fiat Chrysler, which bought them to avoid heavy fines for exceeding EU emissions limits. (In January, Fiat Chrysler merged with Peugeot to from Stellantis; since Peugeot generates credits via its heavily green fleet, Stellantis reportedly won’t keep buying them from Tesla.) Without those credits, which Musk acknowledges will mostly disappear in a couple of years, Tesla would have shown a pretax loss of $426 million. The situation did improve in Q4, where Tesla’s deficit, excluding the regulatory sales, fell to $22 million.
So Tesla ventured into another sideline, gambling on Bitcoin, that so far this year approaches what it made last year on its other sideline, selling regulatory vouchers. Imagine if Bitcoin’s price by the close of 2021 plummets to $10,500. That’s where it stood five months ago in early October. For accounting purposes, Bitcoin is classified as “an indeterminate life, intangible asset.” The designation means that gains in price can’t be booked as profits, but a decrease in the value of the portfolio must be shown as a hit to pretax income at the end of each quarter where the loss occurs. A decline to the October price, which, by the way, was above any level since early 2018, would trigger a $1 billion “impairment.” That write-down would erase the equivalent of almost all of Tesla’s pretax, pre-credits income for last year.
Tesla is now holding a remarkable 4.5% of its total assets and one-eighth of its cash in one of the most volatile speculative investments on the planet.
Musk has sprouted a harvest of Bitcoin tweets in recent weeks that delight the signature crypto’s fans. He has praised his new choice as “simply a less dumb form of cash.” He added that although he’s an engineer, it’s obvious that “when a fiat currency has negative real interest, only a fool would look elsewhere.” Two other comments are the most valuable guides for investors: Musk labeled his Bitcoin foray as “adventurous,” and on Feb. 20 tweeted that “Bitcoin and Eth [Ethereum] do seem high.”
They sure do, and Musk seems to relish embarking on the wildest of wild rides. Safe investments do offer rates that slightly lag inflation. But Bitcoin isn’t an inflation hedge at all. Its value has been hopping all over while the U.S. Price level advances at a slow, steady pace. It’s not so much that Bitcoin is “a dumb currency.” It isn’t a currency at all. And its trajectory depends on the dumbest commodity of all: luck.
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