Tesla's Swoon: Is Bitcoin The Tail Wagging The Dog?

Tesla Inc TSLA continued its recovery off of Tuesday morning’s lows, but the stock remains down about 14.8% since it announced the company purchased $1.5 billion of Bitcoin BTC/USD on Feb. 8.

Some traders are now concerned that Bitcoin prices are primarily dictating the direction of Tesla’s stock price, but DataTrek Research co-founder Nicholas Colas said Wednesday there’s another phenomenon weighing on Tesla at the moment.

Bitcoin Prices Not Hurting Tesla: Colas said the relatively small $1.5 billion Bitcoin investment hasn’t created a sizable risk for Tesla’s balance sheet, given Tesla reported about $19.4 billion in cash as of the end of 2020. Colas estimates that cash gives Tesla a two-year cushion, even if its auto business shut down completely.

See also: How to Buy Bitcoin (BTC)

Instead, what’s likely weighing on Tesla’s stock is the fact that visionary CEO Elon Musk is investing Tesla’s cash outside of the electric vehicle space for the first time.

“Tesla has a great valuation because investors are excited by Musk’s vision of a green and possibly autonomous transportation future,” Colas said. “The minute a company starts investing outside its core competence investors have to consider what valuation multiple that new investment merits.”

Related Link: Long Bitcoin And Short Tesla? Here's Why Elon Musk 'Essentially' Made That Case

Capital Allocation Questions: Historically, Colas said the market doesn’t value financial speculation very highly.

Tesla’s share price may not be driven by the company’s Bitcoin position. Instead, the sell-off is likely coming in response to Musk’s capital allocation decisions.

Colas said Musk has a proven track record of convincing the market that he makes decisions that will ultimately result in outsized, long-term valuations. However, at this point, Bitcoin doesn't yet have that consensus reputation on Wall Street.

Benzinga’s Take: Colas has previously discussed the conglomerate valuation problem created by Tesla diversifying its investments away from EVs and toward cryptocurrencies. Underperforming businesses and investments within a conglomerate drag down the average valuation of the conglomerate because cash flow from the successful businesses ends up being used to support the lagging ones.

Musk’s Bitcoin investment either tells investors that he believes Bitcoin is a better investment than Tesla’s EV business is at the moment, or Bitcoin will weigh on the long-term valuation of Tesla’s EV business if the cryptocurrency underperforms in the years ahead.

Photo credit: Public domain.