Tesla: Will Twitter remain a drag on TSLA stock?

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Josh Warner
By :  ,  Market Analyst

It has been less than three weeks since Elon Musk reluctantly completed his $44 billion takeover of Twitter, and he has wasted no time in imposing his vision for the social media platform. Thousands of workers, including the board of directors, have been ousted and Musk has already experimented with several new features and started to test new models.

But the takeover has increased pressure on shares in his electric vehicle company Tesla, which has shed over 15% since the deal was completed in late October. The stock is down over 40% since Musk launched his offer back in April. Not all of the blame can be put on Twitter considering it has been a tough year for Tesla amid the shaky economic environment, supply chain disruption stemming from China and more intense competition, but there is no doubt that the takeover has contributed to the fall in the share price this year.

Let’s have a look at why Twitter is weighing on the minds of Tesla shareholders.

 

Will Twitter distract Elon Musk?

Musk is best known for being the boss of Tesla, but he runs a number of other companies including rocket firm SpaceX, tunnelling outfit Boring Co and his brain-chip startup Neuralink. Twitter has now been added to that list. While most chief executives find one company enough to keep them busy, Musk is now running at least five major businesses – all at very different stages of development – worth somewhere in the region of $775 billion.

Musk conceded he is working ‘the absolute most amount’ possible ‘from morning till night, seven days a week’ soon after the takeover was completed. ‘I have too much work on my plate that is for sure,’ he said while speaking via videolink on the sidelines of the G20 summit.

That has prompted concerns that Twitter will be nothing but a distraction for Musk at a time when Tesla needs his attention. The timing is notable. Musk has warned that the economic landscape could become more challenging in 2023, so he is now stretching himself at a time when Tesla and his array of other companies are buckling up for the tougher times that lie ahead.

Importantly, Musk has said he plans to spend less time working on the platform and plans to eventually find someone to run Twitter, although warned this could ‘take some time’. However, Tesla shareholder James Murdoch has also spooked investors after testifying in court that that Musk has identified a potential successor to takeover as CEO of the electric carmaker in recent months, sparking fears that Musk could hand over the mantle to someone else.

Notably, Tesla’s largest shareholders appear to have been worried about Musk diverting his focus to other ventures for several years. Ira Ehrenpreis, a venture capitalist on the board of the electric vehicle maker, recently testified in court that Musk was given the largest executive pay package in history in order to keep him ‘engaged’ and to keep him at the company, fully aware that he is a ‘serial entrepreneur’. That testimony came as part of a case led by a shareholder that is unhappy over a multi-billion payout awarded to Musk back in 2018.

‘We wanted Elon to be at the head of Tesla for a long time,’ Ehrenpreis testified, adding that the board at the time held discussions with 10 of its largest institutional investors that agreed there was a need to keep Musk at Tesla.

 

Will Twitter prove a money pit for Musk?

There is a lot of work to be done at Twitter, and it could become costly.

Musk’s takeover has prompted a string of major advertisers to halt and review their relationship with the platform, exacerbating the existing slowdown in demand for digital ads that has hit the wider social media industry this year.

Musk has warned that Twitter might struggle to survive the economic downturn if it doesn’t counter the drop in advertising income with new revenue streams, requiring a new model designed to get users to pay for features and tools through subscriptions. He is reported to have told staff that Twitter is losing $4 million every day, which prompted him to lay-off thousands of staff. The Information said Musk warned Twitter could lose billions of dollars next year. As a result, Musk refused to rule out the possibility Twitter could go bankrupt when speaking to employees. Twitter is thought to have some $13 billion worth of debt after the takeover and has $1.2 billion in repayments due over the next 12 months alone.

With this in mind, the major concern is the amount of resource Musk is willing to divert toward Twitter. Musk sold almost $4 billion worth of Tesla shares just days after completing the takeover and told Twitter employees that he did this to ‘save’ the business, according to media reports.

That means Musk has sold around $36 billion worth of Tesla shares in the last year alone, around $20 billion of which is Twitter-related, according to Reuters.

Reducing his shareholding only compounds fears that Musk will spend less time on Tesla going forward as his incentive has fallen – but he still holds a significant stake of around 14% in the electric carmaker.

The biggest question is whether Musk is willing to continue selling Tesla shares if he needs to raise more cash for Twitter. He had said he was done selling Tesla stock a few months ago before revealing the recent $4 billion sale, suggesting his plan is costing more than he originally thought.

 

Twitter offers little upside for Tesla stock

The Twitter takeover will prove a distraction for Musk, and he will be encouraged to sink even more time into Twitter the more resources he shifts toward the social media platform.

Wedbush analyst Dan Ives removed Tesla from his Best Ideas list following the takeover and warned the outlook is more challenging now that Musk is shifting his focus away from the company. ‘In what has been a dark comedy show with Twitter, Musk has essentially tarnished the Tesla story/stock and is starting to potentially impact the Tesla brand with this ongoing Twitter train wreck disaster,’ the analyst said last week.

‘Musk has managed to do what the bears have unsuccessfully tried for years... crush Tesla's stock by his own doing in what we view as a purely painful dark situation,’ Ives added.

Meanwhile, Morgan Stanley said the knock to sentiment toward Tesla caused by the takeover of Twitter and a slowdown in demand for electric vehicles could test its bear case scenario and push Tesla shares as low as $150 – but said this could create a ‘window of opportunity opening for prospective Tesla investors’ with most analysts still bullish over the long-term.

In a nutshell, there is little to no upside from Musk’s takeover of Twitter for Tesla shareholders. We could see the saga continue to apply pressure on Tesla shares and provide a buying opportunity for investors, but for now it looks like Twitter could remain a drag on the stock at a time when it is already feeling the heat from the challenging economic outlook.

Tesla must continue to deliver and meet expectations going forward to reinstall confidence and avoid accusations that it is being negatively impacted by Musk’s ambitions at Twitter. Any signs of trouble could be immediately laid at Twitter’s door and heighten calls for him to pivot his attention back to his largest and most successful company. However, if Tesla can keep up the recent momentum in terms of deliveries over the coming quarters then we could see the overhang from Twitter start to fade into the background, assuming Musk doesn’t offload more of his Tesla shares.

 

Where next for TSLA stock?

Tesla shares sank to a two-year low of $177 earlier this month but have regained some ground since then.

The first upside target is $208, representing the floor we saw back in June and July 2021 and again in May and June 2022. It could then look to retake the February-low of $234, in-line with the peak we saw at the start of this month. The 100-day moving average at $257, aligned with the level of resistance seen at the end of May, then comes into view.

The 41 brokers that cover Tesla see slightly greater upside potential with an average target price of $267.50, although this has been curtailed from over $300 just two months ago.

On the downside, we could see $182.50 provide some support considering this is aligned with the 2021-low, although the two-year low at $177 remains in play. The RSI was pushed into oversold territory upon hitting this low to suggest it could hold. A move below $168 could be on the cards from here.

 

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