Shulou(Shulou.com)11/24 Report--

Beijing time on the morning of December 12, it is reported that Vicki Bryan, founder of bond investment research firm Bond Angle, said that Elon Musk (Elon Musk) is destroying Twitter at an unprecedented speed. Without Tesla's "blood transfusion", Twitter would not be able to survive. But at the same time, it will also deplete Tesla's ability to cope with future challenges.

Before Musk took over, Twitter was not perfect, but it was not in financial crisis. Revenue is still growing, albeit slowly; management has been considering layoffs to restore meagre profits; at the same time, the company is trying to find ways to boost sales. Everything seems normal.

But that changed overnight after Mr Musk took over. He dismissed Twitter's top management and board of directors, and most of its employees and contractors were laid off. The rest of the backbone are trying to prevent the complete collapse of Twitter's aging infrastructure.

To make matters worse, a large number of advertisers fled after the surge in hate speech and misinformation on Twitter. At the same time, some of Mr Musk's impromptu revenue-boosting measures have backfired or have been deemed too risky. All these commercial troubles occurred after Mr Musk undermined Twitter's cash buffer during the acquisition process.

Vicki Bryan, founder of bond research firm Bond Angle, said: "for more than 20 years, I have been analyzing how a company gets into financial trouble and then how to get out of it, but I have never seen a new management destroy a company as quickly as Musk destroyed Twitter."

So the question is: how does Mr Musk keep Twitter running? Brian said that after years of observing Mr Musk's way of doing business, he might make a disturbing choice: "raid" Tesla.

But at a time when fierce competition is subverting Tesla's market dominance, withdrawing cash from Tesla, Mr Musk's only profitable company, should worry Tesla's investors. Given Musk's obsession with Twitter, Tesla's investors can't help asking: to what extent would Musk sacrifice Tesla to save Twitter?

How to use Tesla to save Twitter? Musk had already financed Twitter by selling a large number of his shares in Tesla and huge loans. This strategy leaves Twitter with few cash buffers to fund its recovery.

Twitter spent $42 billion (from a sale) to buy back and write off the company's shares. Of the $6 billion in cash announced at the end of June, $5.29 billion was used to repay bonds. Musk's leveraged buyout saddled Twitter with $13 billion in expensive new debt and about $1.29 billion in annual interest costs. While the cash dries up, Twitter is still struggling with losses.

In addition to paying severance pay to thousands of laid-off employees and hiring new employees, the cost of collateral damage to Twitter by Mr Musk is also rising. As a result, Twitter may consume a lot of cash for a period of time in its attempt to rebound.

Unfortunately, Mr Musk has broken bridges with potential partners who could help Twitter ease liquidity pressures. Mr Musk's bankers, for example, are unlikely to be interested in lending Twitter more cash. They have faced losses of more than $500m on loans arranged for Mr Musk in April because of soaring interest rates and a deteriorating financial outlook for Mr Musk's Twitter.

Since Twitter LBO debt is valued at only 50-60 per cent of face value, investors who contributed cash to help Mr Musk buy Twitter may have erased the value of their equity. This is very bad news for Mr Musk's other shareholders. They have even admitted that they paid too much "obviously" from the start. They had little recourse because Musk had the most shares and fired everyone who was qualified to challenge him.

Of course, Mr Musk may sell more of his valuable stake in Tesla to continue to fund Twitter. Recently, he did sell another $4 billion worth of shares, claiming to help save Twitter. This may be true, but the amount is also consistent with the possible blow to his personal margin loan. Since Tesla submitted its latest power of attorney on March 31, the company's share price has plummeted 49 per cent. This makes it even less possible for Mr Musk to continue running Twitter, and given his track record, Mr Musk is likely to turn to Tesla, his richest company.

This will repeat the old model of Mr Musk, who has previously used many of his companies to support new or nearby businesses. In 2009, when Tesla was struggling, Musk borrowed $20 million from SpaceX to keep Tesla alive. SolarCity, a solar panel company founded by Musk's two cousins, is also strongly supported by Musk. In 2016, SolarCity was on the verge of bankruptcy and Tesla even acquired it in one fell swoop, taking on about $3 billion in debt.

In 2018, SpaceX investors warned that the company's money was being used to support Musk's tunnel-digging company, The Boring Company. In exchange, SpaceX ended up with a 6 per cent stake in the Boring Company. To this day, Musk's companies routinely do business with each other. It's all done in a big family, a family completely controlled by Musk.

So Musk is likely to try something similar on Twitter this time. Musk has come up with the idea of universal use of "X", which plans to combine social media, payment, news, ordering and other functions. He also founded "X Holdings", which has been used to acquire Twitter, and plans to use it to accommodate all of Musk's companies. Therefore, under the guise of the synergy between Tesla and the "X" Universal App, Musk can instruct Tesla to invest in Twitter in order to obtain potential billions of dollars in cash and resources.

If this happens, Tesla's investors may or may not know to what extent Tesla will support Twitter. Because Tesla can create a "SPE" to invest in Twitter. After all, tracking Tesla's cash is already tricky. As of Sept. 30, about $20 billion of Tesla's cash was held overseas.

Although withdrawing funds from Tesla to support Twitter is a controversial strategy, it will not have a significant impact on Tesla's financial situation, at least in the short term. At present, Tesla has very little debt and recently received S & P's "investment grade" credit rating. Based on EBITDA (earnings before interest, tax, depreciation and amortization) of $18.7 billion in 2022, Tesla's debt-to-EBITDA ratio is only 0.4. This ratio is not only an indicator of the support of cash earnings to corporate debt, but also a key indicator of financial stability.

Even if Mr Musk instructs Tesla to borrow as much as $10 billion to $20 billion from Twitter, it will only raise the ratio to 0.90 to 1.4x, which is still in the "investment grade" rating. Of course, Tesla's situation may worsen in the future. But even if Tesla's EBITDA plunges by half, after adding as much as $20 billion in debt, the leverage ratio will still be less than three times, close to the upper limit of "investment grade" credit, but still at an easily manageable level.

But the ensuing problem is that Tesla's future has become less certain. If the business environment deteriorates and Tesla's operations continue to struggle to maintain profits and cash flow, while Musk does not hesitate to use a lot of cash to save Twitter, Tesla's healthy cash buffer may shrink.

The future of Tesla is bleak? Musk is known as the richest man on the planet, mainly because he developed Tesla into the most valuable carmaker of all time. But as many people have observed over the years, Musk is also a notoriously bad manager and a worse boss.

One thing missing from the legends of Musk and Tesla is that Musk benefited a lot from a great deal of help and occasional timing on the road to success. Thanks to billions of dollars in tax breaks and energy credit subsidies, lax regulation, an obedient board of directors, preferential loan terms, and a relatively favorable stock market, Tesla finally made a profit in 18 years. This is very gratifying. These advantages in the United States, coupled with landmark support from Europe and China for the development of the electric vehicle market, as well as the lack of real market competition, enabled Tesla to survive in the process of difficult survival.

But that luck is drying up. Years of lack of R & D funding, Jerry-building and opportunistic manufacturing have led to a big discount on Tesla's team, which has been near the bottom in terms of quality and reliability. Meanwhile, Tesla's strongest competitors have launched dozens of new models, and dozens more are about to be launched. Moreover, some new products in the future, including CyberTruck pick-up trucks and Semi trucks, do not seem to be enough to revolutionize Tesla to enhance its prospects. No wonder Tesla's share in every major market is declining.

Tesla's plight reminds people of BlackBerry. For years, BlackBerry was also the darling of a new market (mobile phones) until it was eliminated. BlackBerry failed to maintain its investment in new product innovation, ignoring booming market trends until it was overtaken by competitors. In the end, BlackBerry never regained its former glory.

In the absence of new models, as the last market expansion of the most recent model, Model Y, begins to slow, I expect Tesla's incremental delivery growth to end this year. If so, Tesla's slowing revenue growth and shrinking profit margins will dash investors' expectations of continued explosive growth. To be sure, Tesla's performance so far this year has been weaker than the market expected, especially in the third quarter. Although Tesla reduced prices and increased incentives, delivery was still insufficient.

Currently, Tesla's market capitalization is nearly $600 billion, still two to three times the market capitalization of its biggest competitors combined, although it accounts for only 2-3 per cent of global sales. But as Tesla's dominant position in the electric car market weakens, and aggressive competitors' models have surpassed their outdated models, Tesla clearly has room for further decline.

Tesla's bleak outlook has dealt a heavy blow to its share price. Previously, Tesla's share price was under great pressure due to market expectations that Musk would be forced to sell more Tesla shares to complete the Twitter deal, and that the acquisition of Twitter might distract Musk from managing Tesla. Tesla's share price has fallen more than 50 per cent this year, wiping out nearly $700 billion from its market capitalization (compared with its peak at the end of 2021).

We will soon know whether Tesla's current healthy financial situation will deteriorate after the stock market has been hit. Without Tesla's blood transfusion, Twitter might not be able to survive. In the short term, saving Twitter will not kill Tesla, but it will certainly deplete Tesla's ability to cope with the most serious challenges in the future.

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