Elon Musk clearly loves to be in the news and he does so by making outlandish statements about all manner of random topics in the news whenever he has the chance. Jack Shafer provides many examples of this and says that the media keeps falling for it. This has the added advantage (to Musk) of distracting people from the more serious news of the performances of his businesses, which are not good.
What we should be focusing on are the actual facts. One is that in 2021, the last full year when Twitter was public and thus we knew something about its finances, it had gross revenues of about $5 billion ($4.5 billion from advertising) and made a profit of $221 million. This means that its costs were about $4.8 billion. This was a high point for revenues and one of the few years when it made a profit.
After Twitter borrowed about $13 billion to allow Musk to take it private, that added another $1.5 billion in costs to service the debt, meaning its total operating costs are now $6.5 billion. Furthermore, advertisers dropped out, reducing revenues to about $3 billion. This means that Twitter was on a path to lose $3.5 billion a year, which is unsustainable. Musk has cut staff by almost half but that will save at most about $2 billion, leaving a gap of $1.5 billion to close, while risking core operational functions. This problem of a large negative cash flow is what Musk is faced with.
As I said in an earlier post, the share price of Tesla has been tanking and while part of this may well be due to Musk’s obsession with Twitter, other analysts suggest that another reason is that Musk’s hype there has caught up with him, and that the company is finding it hard to sell its cars.
Although most think the weakness in Tesla shares is a direct result of Musk’s Twitter takeover, Johnson believes it’s fundamental.
“It’s just a car company that has built too much capacity they can’t sell,” [GLJ Research’s Gordon] Johnson said on CNBC’s “Squawk Box.”
Tesla has issued five price cuts in China in the current quarter alone, yet the company is unable to meet sales expectations, Johnson said, highlighting weak sales numbers out of China.
That explains the recent declines in Tesla shares, he said.
“Institutional investors are simply … looking at this data and I think they are becoming very concerned because if you look to next year, they are running down their backlog. Their backlog in China has collapsed to nothing,” Johnson said.
He told CNBC that Tesla isn’t able to sell all of the cars it can make, contrary to popular belief. In both the second and third quarters, Tesla produced more cars than it sold, he stressed, adding it’s on pace to do so again.
Tesla’s share price continues to steadily sink, and is now down to about 140 from its high of 407 on November 5, 2021. By comparison, general stock market indices like the S&P 500 and the Dow Jones have increased over that same time period, so Tesla’s losses cannot be blamed on broad factors of the economy.
The real danger to Musk will not come from Twitter, which has become his personal toy, but from upset Tesla shareholders.