What is really behind Elon Musk’s Bitcoin u-turn?

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Elon Musk’s sudden u-turn regarding Bitcoin on Twitter – which sent prices plummeting by 15% – could be more of a PR stunt than anything else, says the CEO of one of the world’s largest independent financial and fintech organisations.

The observation from Nigel Green, deVere Group’s chief executive, comes as the Tesla billionaire boss said the company will halt sales of cars using Bitcoin due to the environmental impact of mining that cryptocurrency.

Green comments: “Musk is once again flexing his influencer muscles on social media. In a somewhat Trumpian move, he’s taken to Twitter to announce a major u-turn.

“Just a few months ago, to much fanfare, Musk announced that his company Tesla had bought $1.5 billion worth of Bitcoin and that it would accept it as payment for cars. The move was one of the reasons the cryptocurrency’s price has soared this year.

“All of a sudden, he’s not so keen due to environmental concerns. But why now? Those issues surrounding the environmental impact have not come up in the last few months? Did Musk seriously not know about them before he bought $1.5 billion Bitcoin?

“There are serious and important environmental matters which urgently need to be addressed about Bitcoin mining. Any action to support the further transition to fully using sustainable energy must be championed – it is something I whole-heartedly support.

“According to research 76% of cryptocurrency miners currently use electricity from renewable energy sources as part of their energy mix. Which begs the question: why, with all his immense resources and power is Musk not able to ensure that all his Bitcoin is mined this way?

“In addition, why is he not using this influence to further advance and incentivise renewable energy for cryptocurrencies – something that Twitter founder Jack Dorsey has previously tweeted about and with which Musk agreed on the social platform.”
Could there also be another driver behind the Bitcoin move?

“Musk likes being known as being a contrarian. He likes to go against the crowd in a high-profile way. Is his waning interest in Bitcoin at a time when huge amounts of institutional investment from major Wall Street banks is pouring in, part of this?”

With the fundamentals of Bitcoin – the very ones that are attracting enormous institutional and retail interest remaining unchanged – many investors are likely to use this current price drop from recent all-time highs as an important buying opportunity.

Previously the deVere CEO observed that inherent traits of cryptocurrencies are ever-more attractive. “These characteristics include that they’re borderless, making them perfectly suited to a globalised world of commerce, trade, and people; that they are digital, making them an ideal match to the increasing digitalisation of our world; and that demographics are on the side of cryptocurrencies as younger people are more likely to embrace them than older generations.”

Green concludes: “Clearly, Musk still believes in Bitcoin – he didn’t sell any – and I now hope he will use not just words but his immense resources to further expediate the transition to sustainable energy for crypto mining.”

Analysing Tesla’s annual financial statement

End the end of last month, Tesla reported first quarter revenues of $10.4bn, marginally ahead of market expectations and up 74% year-on-year. That was driven by a 109% increase in deliveries, as the group ramped up production from its new Chinese factory. This was partially offset by an 83% decline in higher priced Model S/X vehicles, as Tesla shifted its factories to production of newer models.

Despite the shift in sales, operating margins of 5.7% were up on both the same period last year (4.7%) and the preceding quarter (5.4%). That’s despite a 13% decline in average sales price and reflects lower average manufacturing costs. The combination of increased revenue and higher margins meant earnings per share rose 1850% to $0.39, although that remains some way behind analyst expectations.

Automotive revenues in the quarter rose 75% to $9.0bn, with automotive gross margin of 26.5% up nearly a percentage point year-on-year. Revenue from automotive credits was $518m, excluding which automotive gross margins would have been 22%.

Capital expenditure rose 196% year-on-year to $1.3bn, as the group continued to ramp up Model Y production, develop its new German Gigafactory and the changeover to newer Model X and Model S variants. Together with a $1.2bn bitcoin purchase made during the quarter, that meant free cash flow in the quarter fell to $293m, down from $1.9bn last quarter, although improved year-on-year.

Net cash came in at $6.3bn, down from $7.7bn a quarter earlier – reflecting the purchase of bitcoin which is not treated as a cash-like asset for accounting purposes.

The group has not updated its long-term guidance, although delivery of Tesla Semis are expected in 2021.

The share price fell 1.7% in aftermarket trading.

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown comments: “There’s just so much going on in these results. First there’s the remarkable fact that Tesla’s managed to deliver earnings growth in the thousands of percent, despite not producing a single Model X or Model S – the higher priced models that were once its bread and butter. Increased volumes of the lower cost Model 3 and Model Y have more than made up for the shortfall, with lower average manufacturing costs boosting margins and turbo-charging profits.

“Less positively, there’s the complete lack of guidance around near-term production headwinds. A global shortage of computer chips is expected to limit production from all manufacturers in the immediate future, and Tesla won’t be exempt. Given the ongoing importance of its production ramp up, it may even be more heavily impacted.

“Finally – and in it’s incredible that this isn’t the biggest thing going on in these numbers – there’s the first appearance of Bitcoin on a major industrial company’s balance sheet. Tesla has made some $101m on its investment so far, which is all well and good, but huge gains and losses aren’t really what corporate treasuries are all about. Investors could well argue that if they wanted to have exposure to Bitcoin they would have bought some themselves and don’t need Tesla to do it for them.

“Still Tesla has never played by the rules – so far that hasn’t stopped it being a winner.”

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