Is Tesla’s $ 1.5 Billion Bitcoin Buying Smart Business Finance? Experts weigh

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 bitcoin products to be sold, is a prudent use of capital. This is a question that is particularly important given the wild fluctuations that the two share Tesla TSLA,
+ 1.31%
and bitcoins are prone to, although both these assets have seen an almost uninterrupted rise.

“I think it’s a horrible strategy on so many levels,” sent Christopher Schwarz, associate professor of finance and faculty director at the Center for Investment and Wealth Management at the University of California at Irvine.

“Basically, it’s like creating [currency] risk since none of Tesla’s vendors are paid in bitcoins, ”Schwarz told MarketWatch.

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

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

Tesla shares have risen 472% in the past 12 months, making it one of the few mainstream stocks to outperform bitcoin’s 337% gain over the same period,

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

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

“Tesla’s purchase of Bitcoin is an unusual use of corporate cash, which is typically held in more secure and less volatile assets, such as short-term fixed income securities to ensure liquidity and limit volatility. Jerry Klein, managing director and partner at New York-based Treasury Partners, told MarketWatch via email.

“As Tesla shareholders react positively to the news, it remains to be seen how shareholders would respond if a drop in the price of bitcoin negatively affects Tesla’s future earnings,” Klein said. “CFOs are willing to accept risk across all of their businesses, but not with cash on their balance sheets. While bitcoin has risen in recent months, it has been very volatile in recent years, ”he said.

To be sure, Tesla isn’t the first company, and probably won’t be the last, to split some of its bitcoin holdings. MicroStrategy Inc. MSTR Software Company,
+ 29.16%
last year acquired Bitcoin.

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

MicroStrategy reported that approximately 8,200 people attended its nearly 7,000 business weekend conference.

Back at Tesla, Joe Osha, a Tesla analyst at JMP Securities told MarketWatch in a phone interview Monday afternoon that the electric vehicle maker is often portrayed as having problems with cash management, but it thinks that this is wrong.

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

He argues that companies’ 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 this as another step in Tesla’s effort to reinvent the way cars are sold and delivered to people,” said Osha, who refers to Tesla’s direct-to-customer model. Osha estimates that Tesla generated approximately $ 1.868 billion in free cash flow during the December quarter.

Tesla shares rose 1.1% on the day.

Antoni Trenchev, co-founder and managing partner of Nexo, a crypto lender, said it might make sense for companies to put some of their “dry powder” in bitcoin, especially with interest rates close to 0% and the US dollar under pressure, as measured by the ICE US Dollar Index DXY,
-0.10%,
which is down nearly 8% in the past year, according to FactSet data.

“Companies whose dry powder keeps growing have one more obvious cash management option: a partial allocation of BTC,” Trenchev told MarketWatch.

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