On July 1 we suggested an Elon Musk-driven pair trade: Buy Twitter (TWTR), Sell Tesla (NASDAQ:TSLA).
Here’s what we wrote back then (July 1), in a nutshell, followed by what has happened and how things have evolved since then:
When we look at Twitter over the next 6-12 months, we mostly see opportunities and potential.
During the entire third quarter, Twitter and Musk engaged in a fierce verbal and legal battle that contained all sorts of claims, allegations and accusations. Even though there were hints during preliminary hearings/proceedings that Musk’s case is fairly weak, it was clear (to most everybody) that the buyout dispute was heading to court.
On October 4, out of the blue (twitter bird), Musk (through his attorneys) confirmed his intention to complete the $44B buyout deal he had originally agreed to:
On behalf of X Holdings I, Inc., X Holdings II, Inc. and Elon R. Musk (the ‘Musk Parties’), we write to notify you that the Musk Parties intend to proceed to closing of the transaction contemplated by the April 25, 2022 Merger Agreement, on the terms and subject to the conditions set forth therein and pending receipt of the proceeds of the debt financing contemplated thereby, provided that the Delaware Chancery Court enter an immediate stay of the action, Twitter vs. Musk, et al. (C.A. No. 202-0613-KSJM) (the ‘Action’) and adjourn the trial and all other proceedings related thereto pending such closing or further order of the Court.
Three weeks later, the parties closed the deal. October 27 was TWTR’s last trading day on the NYSE, and on October 28 TWTR officially ended its life as a publicly-traded company (until further notice), nearly making it to its ninth birthday (The social media company went public on Nov. 7, 2013).
Shortly after, TWTR’s shareholders received $54.20 in cash for each share they owned, compared to the IPO price of $26/share. This makes for a total return (since the IPO) of 108.46%, and a compound annual growth rate (“CAGR”) of 8.50% =(54.20/26)^(1/9).
Not a great return (under=performing the main indices), perhaps, but still better than the Russell 2000 (small-cap) indices, and nearly twice as much as the total return of the Global X Social Media ETF (SOCL).
When we look at Tesla over the next 6-12 months, we mostly see challenges and threats.
August 4 (Cyber event):
- Elon Musk is spooking investors by saying that “Making macroeconomic prognostications is a recipe for disaster” and adding that the US economy is on track for a “relatively mild recession for something like 18 months.”
- He also disappointed shareholders by pushing the timeline for the Cybertruck rollout: “Cybertruck pricing, it was unveiled in 2019, and the reservation was $99. A lot has changed since then, so the specs and the pricing will be different. I hate to give sort of a little bit of bad news, but I think there’s no way to sort of have anticipated quite the inflation that we’ve seen and the various issues.”
- The truck is now scheduled to enter production in 2023 (originally 2021).
- The company declared a 3-for-1 stock split.
September 15: Tesla’s Gigafactory expansion in Germany delayed indefinitely
September 22: Tesla recalls ~1.1M U.S. vehicles over faulty window automatic reversal system
October 2: Tesla reports record deliveries number in Q3 but misses delivery estimate
October 4: TWTR’s gain is TSLA’s pain. Musk intention to close the $44B-worth buyout means that he will need to sell (a lot) more TSLA shares to fund the buyout, putting pressure on the (already weakening) stock price, and he’s also going to need to allocate (a lot of) time to Twitter, on the expense of Tesla.
October 10: Tesla ‘very likely’ experiencing demand destruction
October 24: Tesla cuts prices in China by up to 9% amid softening demand
October 26: Tesla under criminal investigation for autopilot claims
October 27: Tesla’s autopilot claims attract SEC, DOJ investigation
November 18: Tesla recalls nearly 30K vehicles due to air bag issue
November 19: NHTSA discloses significant recalls, inc. Tesla autos
November 21: Tesla shares touch two-year low amid COVID-driven concerns in China
November 22: Tesla reportedly plans to cut prices in China
To make a long story short, Tesla and Musk have been dealing with lots of challenges and threats indeed.
I love it when a plan comes together just as planned!
Most Accurate “Fortune Telling” Ever!
Again, witting from the July 1 article:
Without getting (or guessing) into the exact price tag that the Twitter takeover is going to get, we believe that eventually the parties will seal a deal. And if that’s the case, it’s safe to assume that Musk will get more involved with Twitter and less involved with Tesla. As a result, we expect TWTR to rise (to the agreed buyout price) and TSLA to lose more steam.
But there’s more to it than “just” Musk.
On one hand, we have a company (Tesla) that’s facing serious operating challenges that are taking a toll on the growth trajectory and upcoming financial results.
On the other hand, we have a company (Twitter) that is getting more and more attention, and is heading into what is likely to become a very important battleground (Midterms) ahead of the US 2024 Presidential Elections.
We choose Twitter.
We stay away from Tesla.
I don’t know about you, but I think this was one hell of a (terrific) “Fortune Telling” by us.
Less than five months since we wrote this and everything we wrote/expected has come to fruition:
- Twitter was taken out for $54.20/share, or a 46% gain since we suggested the pair trade.
- Tesla has suffered major setbacks with the Twitter buyout likely being the biggest one. The stock lost ~59% from its peak value (from $402.67 to $ 166.19), out of which we managed to participate in nearly half.
- Elon Musk is deeply involved (over his head, you might say) with Twitter, dedicating a lot of time to the company (operating activity) as well as to the platform (tweeting activity).
We trust you’re all following/reading the news outlets reporting about the extreme changes/makeover Elon is implementing in Twitter nowadays:
- Massive layoffs that led many to fear the platform might go down soon due to lack of staff.
- Demanding (from employees) a commitment to a new “hardcore” Twitter with longer hours and no remote work.
- Updating free speech vs. hate speech policies.
- Offering (initially, against payment)-then-suspending (due to “impostor-mania”) the blue check verification labels.
- Reinstating banned accounts (including Donald Trump, Kanye West, The Babylon Bee, Jordan Peterson to name a few).
Tweeting Himself to Death and/or Glory
But perhaps more than anything else, it’s the time Musk has allocated to his own Twitter account.
Anyone who is on Twitter couldn’t miss out on Elon himself using Twitter way more than he has done before he took the helm.
The below chart relates only to a three-week timeline in October, but if you go further back in time, the growth rate of Musk’s tweeting activity is one Musk would love to see at the top lines of both Twitter and Tesla.
The man is undoubtedly working hard, both internally but no less externally.
After all, Musk admitted that he and the other investors (who joined the buyout) are “obviously overpaying” for Twitter.
Even for a wealthy person like Musk, $44B is not small money, especially when the past year has seen his wealth shrinking by about $100 this year according to the Bloomberg Billionaires Index.
You can say/think whatever you wish about Musk, but he’s neither stupid nor lazy.
All those who have mocked his undoubtedly-stupid handling of the Twitter buyout – from the initially-overpriced bid, through the lame/desperate legal battle, and up to the recent controversial steps he took at Twitter – are absolutely correct.
On the other hand, all those who were tweeting goodbye to their followers on Twitter over the past week or two, fearing that the end of the platform is near, are/were completely off. No one in his right mind is paying $44B for something just to throw/kill it shortly after acquiring it.
Musk is an eccentric person who draws fire, but he’s also an extremely skilled person, with some great insight and vision who knows exactly where he wishes a business to be over time.
Love him or hate him, we wouldn’t be surprised at all to see TWTR becoming a publicly-traded company in a matter of 5-10 years, with a valuation that is far greater than $44B…
Tesla: We’re No Longer Bearish
Can we say we’re bullish on TSLA ahead of a potential (let alone probable) recession? No, we can’t.
However, can we stay bearish on a company as large and significant as Tesla after its stock has already lost nearly 60% of its value? No, we can’t either.
Technically speaking, we see a good chance for TSLA to get a lot of support here, around the 160s, where both the Sept. 1, 2020, high and the past year’s downtrend channel intersect.
Thing is, even if the bleeding (bearish path) stops it doesn’t necessarily mean that a recovery (bullish path) is about to start.
Analysts – most of whom have been uber bullish on the stock for many years – have become way more hesitant this year, with the consensus price target steadily moving down.
Nevertheless, in recent months we see some stabilization, with the average price target hovering around the 280-300 area, +/-10.
The most recent rating/price target changes have been positive.
Citi upgraded TSLA from “Sell” to “Neutral” as, just like us, they believe that the major pullback “has balanced out the near-term risk/reward.”
They mentioned the (now reasonable) multiple of ~30x (based on estimated EPS for 2023), expectations for better profitability starting about two years from now, and the company’s competitiveness that has likely improved.
Having said all of that, Citi has set its new price target for TSLA at only $176, suggesting very little upside for the stock from here.
Meanwhile, Wedbush Securities’ analyst Dan Ives sees 430K-450K vehicle deliveries this quarter to support his $250 price target, giving the stock an upside of over 47%.
With Tesla approaching the price target of $150 as per his “bear case” scenario, Morgan Stanley’s analyst Adam Jonas is now seeing an opportunity to buy TSLA at “a bargain price.”
Jonas reiterated a price target of $330, reflecting a near-doubling upside potential for the stock.
Finally, as per Seeking Alpha, “Tesla ranks third in quant scores across electric vehicle stocks. The Austin-based automaker has extremely high marks for profitability and growth in comparison to smaller EV players, although the momentum and valuation grades are still lagging.”
We side with Citi on this one, rating TSLA “neutral” right now.
Although we believe there’s limited downside risk from here, we don’t see much of an upside either. As a matter of fact, when we weigh everything in, even now we still can’t say (with a high enough degree of certainty) that the upside potential is greater than the downside risk.
In order for us to be bullish on a stock – any stock, not just TSLA – we need to have that “high-enough degree of certainty.” That’s true at any given time, especially when more and more (economic) clouds are darkening in the (global) skies.
When Reality Perfectly Matches Expectations
Going back to the original article, here’s how we explained the mechanics of the pair-trade (nearly) five months ago:
For the sake of this article, we suggest a pair trade: Long TWTR + Short TSLA.
We suggest starting this trade at a TSLA/TWTR ratio of 18x or better.
Note that the $$$ amounts on both sides of the trade should be equal, no matter what is the exact ratio at the time of trading.
Here’s an example (using a ratio of exactly 18x):
For the sake of simplicity, let’s assume that Tesla (TSLA) trades at $720 and Twitter (TWTR) trades at $40.
The TSLA/TWTR ratio is exactly 18x (=720/40)
For every 1 share of TSLA that we sell short (for $720) we buy 18 shares of TWTR (for $40 each).
Note that basically, this is a zero-sum trade because the amount we pay (for buying TWTR) is fully covered by the amount we get (for selling TSLA).
Under perfect conditions, we believe that the ratio has a potential to move from 18x to as low as 10x, or even 9x.
What are “perfect conditions”?
- Musk buys Twitter for $54.20/share, per the signed agreement.
- TSLA retests its 2021 low at $539.49
In such case, TSLA/TWTR ratio would be 539.49/54.20 = 9.95
And if we get another 10% bonus (by TSLA moving down further), the 9.95x ratio could turn into 9x, a ratio that was met twice during 2021.
[*Note that all the above figures relate to Tesla’s stock price prior to the 3-for-1 stock split that took place in August. Therefore, as a result of the split, the originally-mentioned 18x (starting), 9.95x (principal target), and 9x (bonus target) ratios became 6x, 3.317x, and 3x, respectively, and TSLA’s 2021 lowest price of $539.49 turned to $179.83]
Now, let’s see how things have evolved:
1) Tesla stock price touched the 2021 low on Nov. 9, 2022 (Daily low was $177.12) so this box got ticked.
2) The 3.317x (originally 9.95x) ratio was hit on the very same day (Nov. 9) when TSLA stock price traded as low as $179.76 [3.317x=$179.76/$54.20**]
3) TSLA lowest price (thus far in 2022) was $166.19 (on Nov. 22), accounting for a ratio of 3.066x [=$166.19/$54.20**]
[**Since TWTR was bought out for $54.20, that has become the constant price we’re using to measure the TSLA/TWTR ratio.]
Although we didn’t hit the 3x (originally 6x) ratio, we remind you that 3x was a “bonus”, not the principal target. Therefore, we were happy enough with 3.066x to take profits and put this pair-trade to bed.
At this point, some of you might think/claim that we’re trying to rewrite history by posting this article as quickly as we can, a day after TSLA stock price jumped nearly 8% (during normal hours) – its best daily performance in over four months.
There’s no better way we could respond to such a claim than to direct you to our Twitter account where we already issued (regarding this very same pair-trade) a “Mission Accomplished” announcement the day before (the 8% spike).
So no, we’re not rewriting history.
But yes, we’re making history.