Tesla Inc (NASDAQ: TSLA) continued its recovery after Tuesday morning lows, but stocks have continued to fall by about 14.8% since it announced that the company bought 0.5 billion euros. Bitcoin (CRYPTO: BTC) on February 8.
Some traders are now concerned that Bitcoin prices are mainly dictating the direction of Tesla’s share price, but DataTrek Research co-founder Nicholas Colas said on Wednesday that there is another phenomenon weighing on Tesla at the moment.
Bitcoin prices do not hurt Tesla: Colas said the relatively small investment of $ 1.5 billion in Bitcoin did not create a considerable risk to Tesla’s balance sheet, as Tesla reported about $ 19.4 billion in cash in late 2020. Colas estimates that the money gives Tesla a two-year reserve, even its auto business has closed completely.
Instead, what is probably weighing on Tesla’s shares is the fact that visionary CEO Elon Musk is investing Tesla’s money outside the electric vehicle space for the first time.
“Tesla has a high rating because investors are excited about Musk’s vision for a green and possibly autonomous transport future,” said Colas. “The minute a company starts investing outside its core competence, investors have to consider what multiple of valuation this new investment deserves.”
Related link: Long bitcoin and short tesla? See why Elon Musk ‘essentially’ made this case
Capital allocation issues: Historically, Colas said the market does not place much value on financial speculation.
Tesla’s share price may not be determined by the company’s Bitcoin position. Instead, liquidation is likely to occur in response to Musk’s capital allocation decisions.
Colas said Musk has a proven track record of convincing the market that he makes decisions that will result in long-term, out-of-the-box assessments. However, at this point, Bitcoin does not yet have that reputation for consensus on Wall Street.
Benzinga’s opinion: Colas previously discussed the conglomerate valuation problem created by Tesla by diversifying its investments away from EVs and towards cryptocurrencies. Underperforming businesses and investments within a conglomerate drag down the conglomerate’s average valuation because the cash flow from successful businesses ends up being used to support those who are behind schedule.
Musk’s Bitcoin investment tells investors that he believes Bitcoin is a better investment than Tesla’s EV business at the moment, or Bitcoin will weigh in on Tesla’s long-term EV business valuation if the cryptocurrency performs lower in the coming years.
Photo credit: public domain.
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