Elon Musk is a strange guy eh? He seems to be in a hurry and everything he turns his hand to becomes magic — right from the start.
X
His second venture, X.com, is remarkable in that he was able to purchse this single letter domain in 1999. Anyone who can do this is going to go far.
After getting bought out by Peter Thiel’s PayPal (and then ousting Peter Thiel) Musk took home $175 million. That’s probably what the domain name is worth, which he still owns. Check out x.com. It’s the most awesome website you’ll ever go to.
Space X
It took Musk just 7 years from founding Space X to launching a rocket into orbit in 2008. That’s pretty fast; it took Boeing 8 years from announcing the 787 to its first commercial flight on 2011. It cost Space X about $10 billion to develop and launch over 2,000 Starlink satellites into orbit, while Boeing spent over $50 billion just on development and needs to sell another 1,000 787s to break even.
While 787s were grounded in 2013 and again in 2020, you can still see Musk’s Starlink satelites flying overhead every night. SpaceX plans to launch another 42,000
Tesla
Musk joined Tesla as chairman in 2004, 8 months after it was incorporated. Four years later its first car rolled off the production line. That’s pretty fast — it took GM five years from development to production of the Chevy Bolt in 2018. And as usual, GM is losing $5-10k a vehicle. Tesla became profitable in 2020 and delivered a $5.5 billion profit last year.
Right now, Tesla (NASDAQ: TSLA) has a market cap of just over a trillion bucks (200x earnings) while GM (NYSE: GM) has a market cap of $58 billion (5.9x earnings). The market has starkly contrasting views of these two companies.
Let’s face it, Twitter (NASDAQ: TWTR) is missing its mark as a social media company, and the board doesn’t seem to understand the basics of running a profitable enterprise.
This company was hardly relevant until Donald Trump started using it as the main communication platform fo the Whitehouse. The stock tripled in four years from $17 to north of $50 despite the current management.
Then, because of “the risk of further incitement of violence” Twitter cancelled its #1 source of free advertising.
For any other company, this would be a face palm moment.
Twitter’s entire business model depends on people tweeting constantly so they can sell the data to Google, LinkedIn, and NewsCred — a marketing company that sells the information that you so freely shared on Twitter, Facebook, LinkedIn etc.
Kicking off Trump was a disaster. The Trump presidency saved the company.
And not just any company. Twitter is a principled company. It runs according to five key principles. Here’s the first one — direct from its website:
Freedom of speech is a fundamental human right — but freedom to have that speech amplified by Twitter is not.
Twitter’s first principle
At least they are honest when they say they are anti free speech.
Twitter also claims to label claims that are disputed, such as The world is flat, Inflation is good, drugs can cause autism or heart problems, the common cold is a dangerous and deadly virus, climate change is bad, or America is the best country in the world. My feeling is that Twitter is a little subjective here.
Elon Musk, on the other hand, claims to be a free speech absolutist. One would assume that unbanning tens of thousands of twitter users and allowing contentious speech would have a positive impact on the bottom line.
It may lose Pfizer and Moderna as advertizers, but there are plenty of other options out there.
The offer
Musk now owns 9.2% of the company and has offered $54.20 a share to take the company private. The current share price is $45.08, so that’s a pretty reasonable upside.
There are several questions to ask here:
- Will the board accept it? Clearly not. Twitter’s revenue and user base is growing and it was traded as high as $77.06 early last year just after banning Trump. The board has an obligation to ask for at least $77.
- Will Musk make a higher bid? Musk claimed it was his “best and final offer” which is what all offers claim to be. But he also claimed he doesn’t care about the economics of it, so maybe he’ll go up a bit.
- Will any other offers come to the table? Now that Twitter is in play, it opens the door for other companies to snap it up. But $40 billion simply won’t be enough. The big one is Apple, which doesn’t currently have a big slice of social media. Fund management firm Appolo has publicly stated that it would be interested, although nearly every fund management firm other than Blackrock and Vanguard will have an interest in making money out of a takeover. So yeah, there’s a good chance.
- Who wouldn’t want to buy Twitter at this price if Musk is going to take it over? He has an awesome track record and if the current left wing muppets at the helm of Twitter can steer it to a valuation of over $50 billion, you can bet your bottom dollar that Musk can do a lot more. I don’t think you would be the only one to bet your bottom dollar either!
- Where will the money come from? Even for the world’s richest man, $40 billion is a big bunch of cash. You’ll recall that he recently sold a bunch of Tesla stock based on someone seeming to dare him to do it. Really? Tesla is incredibly overvalued, but if Musk starts selling down with no reason, it’s valuation will collapse, despite making a profit for once.
- When will this happen? Big question. No idea, but probably sooner rather than later. Musk won’t want to wait around for the Fed to bring in any more rate hikes. That will take the stockmarket even more. Right now it looks like the Fed will hike rates by 25-50bps each meeting, which will of course crash the market, blow up bond funds, and blow up the government’s interest bill by around $250 billion per year per 1% increase. The next raise is next month, so the time to act (for Musk and for us) is right now.
Here’s what I suggest:
1. Buy a near term vertical call spread on Twitter
I recommend the May 13 45/50 vertical call spread. This gets us past another Fed meeting. Right now you should be able to buy this for $2.50 per spread ($250 per contract) or $2,500 for a 10-contract position.
If Twitter remains at its current $48.45 then this will make a dollar profit. If Twitter stock moves up closer to the bid price of $54 — very likely if there’s a suggestion of a competing bid — then the position will be worth $5 ($5,000 for a 10-contract position) and you’ll have doubled your money.
I suggest paying up to $2.75 per spread.
2. Buy a vertical put spread on Tesla
Back in November when Musk first dumped shares on Telsa following a Tweet, the stock crashed by $200 from $1,222 to $1,023. I doubt this would happen again given that he’s since sold a bunch more. BUT, he does seem to want a reason to convert some more of his overpriced Tesla stock into cash. Could it be that the future for electric cars isn’t as rosy as we throught it would be? There’s certainly a big supply issue on the horizon with the entire Chinese economy on hold and a big rare earth metals shock on the near term horizon.
When Musk sells his Tesla shares, we can expect a $70-100 dip. Moreover, we could expect a big dip anyway if the Fed comes out with a rate hike. The odds of a rate hike and/or Musk selling some stock in the next few months is very, very high.
I recommend buying the June 20 940/960 put spread. This gives us a full two months for the Fed to raise rates and/or Musk to dump some stock. If Tesla shares fall by $70 from their current $1,004 over the next two months, then this spread will be worth $20. Right now you should be able to buy it for $7.7 per spread ($770 per contract), or $2,310 or a 3-contract position.
The two legs of this spread are the TSLA220617P00940000 (long) and the TSLA220617P00960000 (short).
If this works out as I expect, then this position will be worth $6,000 for a 160% profit. I suggest paying up to $8 per contract.
Cheers,
Peter.
