Tesla (NASDAQ:TSLA) stock has cooled off in recent weeks despite the company getting as much free publicity as ever. The latest headlines may be the most exciting ones yet for CEO Elon Musk’s droves of social media supporters.
Earlier this month, Tesla reported a $1.5 billion investment in Bitcoin (CCC:BTC-USD). The headline understandably blew up online given the recent buying frenzy in both Tesla stock and bitcoin. But while cryptocurrency investors rejoiced, I wasn’t the only one who saw Tesla’s crypto investment as a potential red flag.
Tesla Stock Distractions
While many of Musk’s devoted followers see him as a champion of engineering and green energy, I believe his ultimate legacy will be a different one. I think Musk deserves the most credit for figuring out how to best navigate the modern social media landscape. I don’t say that to be dismissive of everything he has accomplished at Tesla. But the massive gap between Tesla’s business and its market valuation are a testament to Musk’s ability to convince his followers that the company is something that it is not.
One way Musk controls the online narrative is by distracting from negative Tesla headlines. Musk could have chosen any time to buy Bitcoin, and he’s an extremely savvy promoter. He definitely chose the timing of the Bitcoin purchase for a specific reason.
“Chinese regulators summon Tesla on quality issues as consumers complain about quality…but $Tesla bought $BTC,” Scion Asset Management head Michael Burry recently tweeted. “In my mind’s eye, so much #digitalconfetti.”
Burry gained notoriety by profiting tremendously on the bursting of the housing market bubble during the financial crisis. Now he’s betting on a similar bursting of the electric vehicle bubble by shorting Tesla stock.
I recently wrote about how pissed off China seems to be with Tesla after it issued its second massive safety recall in less than a year. If you missed it, there’s a good reason. The China news was buried under a mountain of Tesla bitcoin articles.
Bitcoin Is Off-Brand
If you’re skeptical of just how much Musk is able to control the TSLA stock narrative, consider this. Most Tesla investors would say Musk and Tesla are champions of the environment, fighting against the evil legacy auto market. Those legacy companies, like Ford (NYSE:F) and General Motors (NYSE:GM), are destroying the world with their internal combustion engine (ICE) vehicles. That’s the narrative, at least.
In reality, both Ford and GM are investing hand over fist to electrify their products. GM is investing $27 billion in rolling out 30 new EV models by 2025. Ford is investing $22 billion in its own electrification efforts between now and 2025.
Meanwhile Musk and Tesla, champions of the environment, are investing in Bitcoin. Bitcoin mining emits 36.95 megatons of CO2 annually. That’s equal to the emissions of about 8 million ICE automobiles, according to the EPA. Ford and GM sold about 6.7 million vehicles combined in 2020. In other words, in 2020, Bitcoin did far more damage to the environment than both those companies combined.
More Tesla Stock Problems
Bitcoin is horrible for the environment. So why did Musk buy? I think Burry is right about the possibility that Tesla’s China business may be in trouble. It’s also not great that third-party testers recently found Tesla’s real-world battery ranges are consistently significantly lower than advertised. Car and Driver has compiled an excellent summary of how Tesla cheats the system on its mileage ranges.
Former Bernstein analyst and CEO of Aegon Asset Management Gary Black recently disclosed that he sold his stake in Tesla stock after buying in August 2019. He said he would be looking to buy back in at some point, but there seems to be too much risk at the moment.
“The absence of clear FY’21 delivery guidance, increased odds of a 1Q miss, and a more risky capital allocation policy/higher earnings variability were the primary factors.” Black said.
The more risky capital allocation policy seems to be a direct reference to Bitcoin, which is little more than a casino at this point. I don’t think Musk is simply gambling with Tesla’s cash. I think there’s a strong possibility he is deliberately distracting from Tesla’s myriad of other problems.
How To Play It
I’m still not recommending anyone short TSLA stock. At this point, I believe Musk could stand in the middle of Fifth Avenue and shoot someone and his followers still wouldn’t sell their Tesla shares. But I also wouldn’t recommend buying stock in a company that has so much underlying risk related to its quality issues, its potential strained relationship with China, its reliance on waning regulatory credit sales, its looming tsunami of legacy auto market competition and its cryptocurrency market speculation.
On the date of publication, Wayne Duggan held a long position in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.