by Elon Musk is in the right place at the wrong time.
Musk built his billionaire reputation as an early mover — early to see the potential of mass-producing electric cars or reusable rockets. But now that it looks like he’ll have to honor his deal to buy Twitter, it’s clear that Musk has backed out of two of his biggest bets. The survival of his empire will depend on whether he can bring new light to parts of the market that have gone dark.
The first of these bets is Twitter. During the pandemic, tech stocks — including social media companies — soared. Buoyed by low interest rates and investors willing to bet on the future, Twitter stock hit an all-time high in late 2021. But since the Federal Reserve began raising interest rates in early 2022, the stock market has tumbled and social media stocks have been hit hardest. Not to mention that regulatory headwinds from state and federal officials abound. And even before all of this, Twitter never generated the cash it will desperately need to pay off the massive amount of debt Musk is about to saddle the company with.
Musk — pretty much the world’s most liquid billionaire — will have to get cash from somewhere, and the most obvious place is from selling parts of his massive Tesla stake. The timing for this is also wrong.
Musk’s second bet behind the seasons is the Chinese consumer. Beijing has been extremely supportive of electric vehicles, and two years ago the Chinese consumer was still seen as a safe bet in corporate boardrooms around the world. The pandemic changed that. Chinese President Xi Jinping’s zero-lockdown policy has ravaged the economy, which was already slowing under pressure from a deflating housing bubble. Consumer sentiment is weak and GDP growth for the first six months of the year was 2.5%, well below the government’s target. Musk needs a healthy Chinese market to validate Tesla’s big investment in the country — but it may not be there for him.
Musk made his fortune during booms and busts. Tesla went public in 2010, just before tech stocks enjoyed their glorious run so far this year. This will be its first attempt to survive the stock market crash and global economic recession. These are the kinds of financial conditions that shake even the most stable of companies, and neither Tesla — which only started making money last year — nor Twitter have ever been one.
Bitter Twitter
Musk should have realized that Twitter would be difficult and expensive to turn around, since the company never generated substantial cash flow. What Musk and his loyal, longtime bankers at Morgan Stanley may not have known is the extent to which economic and market conditions would make Twitter’s future even bleaker. When tech stocks were the darlings of the pandemic rally and money was easy to borrow, there was a case for continued growth and investment. But even before Musk decided to join Twitter, that was beginning to change — and that story is definitely over now.
Now that interest rates are rising, investors want to see real cash and real plans. As a result, Twitter’s social media peers are crashing. Snap, which completed its first profitable quarter last February, is down 77% year-to-date. Meta, the truly profitable artist formerly known as Facebook, is down nearly 60%. Both companies are laying off staff because they expect the recession to hurt their bread and butter, ad revenue — which also happens to make up 90% of Twitter’s revenue.
Musk didn’t just make a late bet on a declining industry — he made matters worse by trying to back out of the deal. When Musk first announced the Twitter purchase, the tech-heavy Nasdaq wasn’t even in a bear market. It is now down 30%, worse than other major indexes such as the Dow (down 16%) and the S&P 500 (down 20%). Its purchase price of $54.20 per share may have been a joke in April, but after nearly six months of delays it has become a real farce.
Things have gotten so bad between the announcement and the resolution of the legal drama that it’s unclear whether all the tech-hungry bros who were interested in striking a deal with him this spring are still interested enough to lend Musk their “sword ». ” or whatever and chip in for equity.
And to the Wall Street bankers lending Musk the money he needs to buy Twitter, the deal certainly looks a lot bleaker because of rising interest rates. Bond analyst Vicki Bryan described their reaction as a “collective stroke.” The debt that Twitter and the banks will have to issue to finance the deal will almost certainly be rated junk. But the market for junk-rated debt has plummeted over the past year, so banks will have to figure out how to shove $12.5 billion worth of debt down the market’s throat. Almost every debt analyst agrees that this won’t be pretty.
“I suspect bankers have been panicking about this deal for several months now as bond yields soared and investor appetite for Elon’s nonsense plummeted. If they could have walked away they would have done so already,” Brian told me.
Selling bonds on Twitter will be a particularly grueling job, given that Musk himself has forgotten the company’s reputation. In July, Bloomberg estimated that taking on the Twitter deal would result in $150 million to $200 million in losses for Morgan Stanley. Credit conditions have gotten worse since then and are getting worse. That’s not a loss Morgan Stanley is likely to forget if Musk needs more money in the future — and given Twitter’s financial outlook, it likely will.
It’s not just the market that hates social media – the public also hates the platforms. In a 2020 Pew Research Center survey, 64% of Americans said social media has made the country worse. Republicans complain that content moderation infringes on free speech. Democrats complain that content moderation is not strong enough. Texas is trying to ban content moderation while the Supreme Court is set to hear a case over Section 230, the 1996 rule that exempts social media companies from liability for content posted on their platforms. Social media companies were the jewels of Silicon Valley, an American success story of how we can connect the world. But now it’s a regulatory minefield with dubious prospects in the middle of a cyclical meltdown that will plague their businesses for years to come – and Musk is deep in it.
Beijing opted for a slowdown
Then there is China. Musk has bet big on Tesla’s success in the world’s biggest auto market, building a factory in Shanghai in 2019 and making the country central to Tesla’s operations. But the all-in bet on China is also failing. Beijing’s zero-covid-19 strategy shut down Tesla’s factory this spring and continues to dampen consumer demand. The ugly real estate market has Chinese millennials and Gen Zers embracing an “affordable living” trend. While the world worries about overheating consumer demand, China’s policymakers worry about the opposite: a lack of demand that could cause the economy to collapse.
This brings us to Tesla’s situation. In the third quarter, the company missed its car delivery expectations by about 7%. It built nearly 366,000 cars but delivered only about 344,000. It said in a press release that logistical snafus prevented its deliveries. But in August, Tesla sold more Chinese cars abroad than in China. The same goes for July. If demand for cars in China was lower than the company expected in August and September, Tesla would have to face the logistical nightmare of getting more cars out of China instead of sending them to domestic customers.
The lack of demand in China is not going to change anytime soon. China is still using lockdowns to deal with the virus and has not approved an mRNA vaccine for use in the country.
“In reality, the yardstick by which Xi measures the success of health measures is more likely to continue to be health, not GDP,” said a recent report by watchdog China Beige Book. “Without a national vaccination campaign with mRNA vaccines, Covid-Zero will not be dismantled, leaving the end of restrictions up to the virus itself.” And that means the economic recovery will also depend on the virus.
Add in delivery issues, China weakness and the general tech meltdown, and Tesla stock is down 32% year-to-date. This, obviously, is also terrible news for Musk in the (likely) case that he has to sell Tesla stock to bolster Twitter’s operations.
WSED: What should Elon do?
Can Musk fix any of this? It can. Who knows? I certainly don’t, and he doesn’t seem to either. Chinese officials have made it clear to Tesla that they have all the power in their country, not Musk. He would never dare defy their orders by, say, keeping his factory or showrooms open through the COVID-19 measures. In fact, Tesla plans to close showrooms across the country and revamp its sales strategy there.
As for Twitter, if the text messages revealed in Twitter’s recent lawsuit against Musk are any indication, Musk has no idea how to change Twitter. Back in March he was blasting messages from rich guys and tech bros who seemed to have a lot of feelings about how Twitter should work, but very few ideas about how to monetize the platform. These men will not help Musk once the sale is completed. For that, Musk may need to look beyond his phone contacts, which will take valuable time, attention and cash away from the rest of his empire.
Linette Lopez is a senior correspondent at Insider.
