Could Elon Musk Face A Margin Call On His Tesla Shares?

Zinger Key Points
  • As of Monday’s close, the issue was over $428 higher from the margin call trigger price of $570. 
  • Assuming the issue closes at $890, a decline of $108 or 25% of that margin in only one session is significant. 

Based on just over one day of price action in Tesla Inc TSLA and Twitter Inc TWTR, Elon Musk's deal to buy the social media platform seems to be on shaky ground.

It is anyone’s guess how the deal will wind up, but Tesla and Twitter shareholders should be aware of what Tuesday’s price action may be indicating: Musk’s purchase of Twitter may not go through, and if it does, it may have a negative long-term impact on the price of Tesla shares.

Risk Arbs Not Biting: With a $54.20 cash deal on the table, the risk arbs want nothing to do with riding out the last roughly $4 of the deal. In fact, the issue peaked on Monday at $52.29, shortly after the deal was announced, and has been under selling pressure in Tuesday’s session, moving farther away from the takeout price as it struggles to remain above $50.

Related: Will Elon Musk's Twitter Kowtow To Chinese Communist Party Influence?

Tesla Stock Pledged As Collateral: In order to do the deal and not put up all of the money for his crusade to improve “freedom of speech,” Musk brought in Wall Street firms to help finance the deal.

Musk had to go through 12 different Wall Street firms to get the financing needed, according to SEC data. Perhaps the reason for that was none of the banks wanted too much exposure to the deal.

Screenshot via the SEC. 

Free Look To The Downside? A few different dynamics may explain the cratering of Tesla shares in Tuesday’s session.

The first and most probable one is that it was just a technical breakdown. As indicated by the chart below, $975 had been the “Rock of Gibraltar” of support, and when that level was breached, longs began heading to the exit and aggressive shorts piled on.

The second and not-so-likely is that if the Wall Street firms that have Tesla’s shares as collateral are shorting the stock, as they theoretically have a free look to the downside.

In other words, if the shares go down enough, Musk will be forced to sell shares to meet his margin requirements. Once again, this is not likely. 

Yet if they wanted to get the ball rolling and instigate other shareholders to sell, the breaching of the $975 level was a great start.

Margin Calls Not Likely For Now: As the information below indicates, Tesla would have to fall a long, long way in order for a margin call to be triggered. Nevertheless, if the shares were to fall to their February low ($700), Musk would be taking a major haircut on his remaining stake. 

And if there is one thing we have learned over the last year, it's “never say never” when predicting how far a stock can fall.

More Collateral? As of Monday’s close, the issue was over $428 higher from the margin call trigger price of $570. 

Assuming the issue closes at $890, a decline of $108 or 25% of that margin in only one session is significant. With earnings coming out from some of the big guns in the tech sector, a few miscues could put additional selling pressure on the issue — not to mention a volatile market that is not far from testing the March lows.

In the event that occurs and Tesla continues to deteriorate in price, Wall Street firms may ask for additional collateral. In that event, it may trigger another round of profit taking and another leg down in the issue. 

The Last Word: Whether the above information makes any sense to you or not, the price action in Tesla and Twitter in Tuesday’s session is concerning.

Does it mean the deal is not going to go through at $54.20? No. Does it mean that Tesla shares are heading much lower? No.

For now, only time will tell.

Disclosure: The author of this article no longer has a long position in Twitter and has a long position in Tesla. 

Photo courtesy of Tesla. 

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