Is Tesla’s $1.5 Billion Bitcoin Purchase Good Corporate Finance? Experts weigh

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

The price of Bitcoin BTCUSD,
already on a stratospheric ascent, got an extra boost since the announcement, with just one bitcoin changing hands on Monday at $42,709, up more than 9%. Prices hit an all-time high near $45,000

But one of the key questions swirling around the electric vehicle maker’s decision is whether the decision, including the decision to eventually allow its products to be sold in bitcoin, is a prudent use of capital. This is an especially important question given the wild swings that Tesla’s two TSLA stocks,
and bitcoin are prone to, even though these assets have both been rising almost uninterrupted.

“I think it’s a terrible strategy on so many levels,” Christopher Schwarz, associate professor of finance and faculty director at the Center for Investment and Wealth Management at the University of California, Irvine, said in comments. by e-mail.

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

An email to the company for comment was not immediately returned.

Musk’s moves come as Tesla focuses on ramping up its production of electric vehicles, with its share price soaring, but the automaker remains a relatively niche player despite its market value of more than $800 billion. dollars.

Tesla shares are up 472% in the past 12 months, making it one of the few traditional stocks to have outperformed bitcoin’s 337% gain over the same period.

the The Wall Street Journal noted that Tesla took advantage of its rabid investor base and rising stock price to bolster its cash position, boosting its cash position to about $19.4 billion at the end of last year from about 6 .3 billion at the end of 2019.

This means that his current bitcoin allocation is around 8% of his cash holdings.

“Tesla’s purchase of Bitcoin is an unusual use of corporate money, which is typically held in safer, less volatile assets, such as short-term fixed-income securities to provide liquidity and limit volatility. “said 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 the price of bitcoin negatively affects Tesla’s future earnings,” Klein said. “CFOs are willing to accept risk across their businesses, but not with the cash on their balance sheets. While bitcoin has been rising for the past few months, it has been very volatile for the past few years,” he said.

Granted, Tesla isn’t the first company, and likely won’t be the last, to allocate some of its holdings to bitcoin. MicroStrategy Inc. MSTR Software Company,
last year acquired some bitcoin and was a champion of other companies.

MicroStrategy, which recently hosted a virtual conference on the utility of bitcoin for businesses, estimates that around $50 billion worth of bitcoin is held by private and publicly traded companies, citing data from

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

Back at Tesla, Joe Osha, a Tesla analyst at JMP Securities, told MarketWatch in a Monday afternoon phone interview that the electric vehicle maker is often portrayed as having cash management issues, but believes this is a false assessment.

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

He argues that corporate investment in bitcoin is insignificant compared to the scale of its ability to generate cash and aligns with the company’s strategy of being a disruptor.

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

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

“You have volatility here that’s about 10 times greater than the euro,” said the professor, who served as an economist and director of the Securities and Exchange Commission’s Office of Economic Analysis from 2004 to 2007.

“This movement poses a lot of challenges for a company to keep [bitcoin] on their balance sheet, but it also poses challenges from a consumer perspective,” he said.

Shares of Tesla closed up 1.3% on Monday.

Antoni Trenchev, co-founder and managing partner of Nexoa crypto lender, said it might make sense for companies to put some of their “dry powder” into bitcoin, especially with interest rates approaching 0% and the US dollar under pressure, such as measured by the ICE US Dollar Index DXY,
which is down nearly 8% from a year ago, according to FactSet data.

“Companies with ever-increasing dry powder have one of the most obvious cash management options: partial BTC allocation,” Trenchev told MarketWatch.

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

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