Tesla Stock Drops After Elon Musk Offers to Buy Twitter. This Is Why.

Twitter investors seem to be happy. Twitter stock has risen about 25% since Musk disclosed his stake in the social-media platform. Tesla investors have little to celebrate. The stock is down about 8%, while the
S&P 500
and
Nasdaq Composite
are off about 2.2% and 4.3%, respectively.

Tesla stock is typically more volatile than the market. That is one reason shares are down more. But Tesla investors might also be a little concerned about what Twitter means for Musk.

There is the possibility of distraction. Twitter might steal Musk’s focus away from Tesla during a time when EV sales are ramping up across the globe. Tesla is expected to see rapidly rising sales—and competition—in coming years.

The distraction might also be making investors consider who could run Tesla other than Musk. Roth Capital analyst Craig Irwin told Barron’s that Tesla is Musk and Musk is Tesla. He doesn’t believe there is another executive at the company that can drive Tesla forward like Musk can.

The other reason Tesla stock might be down is that Musk might have to pay for Twitter with Tesla stock. Don’t forget that Tesla stock dropped a quick 16% in the two days following a Twitter poll Musk ran asking if he should sell 10% of his Tesla stake to pay taxes on unrealized capital gains.

The Twitter-verse said “yes” and Musk sold more than 15 million shares, worth more than $16 billion. Tesla stock still hasn’t reached its pre-poll high of more than $1,200 a share. Tesla stock’s 52-week high, at $1,243.49, was set just a few days before the poll ran. Tesla stock was at about $1,009 in premarket trading.

Selling large blocks of stock can result in outsize price moves in any share. It isn’t easy to place a lot of stock. At the offer price of $54.20, and accounting for what Musk already owns, buying Twitter would take roughly 39 million shares of Tesla. That is a lot of stock.

Of course, perhaps Musk could buy Twitter without selling shares. He could borrow against his Twitter stake, with the loan secured with his Tesla position. That isn’t an unconventional idea.

It would avoid outright selling of Tesla shares. Musk “can line up a private equity backer or lenders who can provide leverage,” says
Future Fund Active ETF
founder and portfolio manager Gary Black. “He can sell some SpaceX shares. He doesn’t necessarily have to sell more [Tesla] stock.”

Tesla stock might also be down, because the idea that richest man in the world buying one of the largest social media platforms on the planet is hard for investors to fathom.

Write to Al Root at [email protected]