Meltdown Monday #5 - Social Media Turf Wars

Plus Spying, Tesla Price Cuts and More!

Dr Buck

Apr 10, 2023

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For the Week of April 10, 2023

Tesla Cuts Prices, Again

Last week, we discussed price cuts at Elon’s car company:

As of early last year, analysts were still projecting that Tesla would be selling 470k plus cars in Q1 2023. In reality, they sold only 422k units, a mere 5% increase over Q4 of last year. That’s not even the worst part. In order to pull off such a pathetic gain, with 4 factories supposedly up and running, Tesla had to cut prices by 15% across the board, which is… not good? I don’t think?

Keen followers of order flows have noted that even after the initial round of cuts in December and January, current order rates weren’t exactly robust, and certainly not high enough to meet the company’s projected 50% annualized growth. The next round of cuts was only a matter of time, and I wrote this on Twitter:

Sure enough, shortly after US equity markets closed for a three-day Easter weekend, Tesla Cut Prices again!

As reported by AP, prices for the expensive S & X models were slashed by $5,000, the CUV Model Y by $2,000, and the Model 3 by $1,000. All in, this is about a 5% cut and will cost the company roughly $3-4 billion in revenue and profits compared with what was projected by Wall Street only a few months ago. For a company trading at 80x earnings and 10x revenues, that’s a big hit, and we should see some serious weakness in TSLA 0.00%↑ stock, the real moneymaking product for Tesla.

Musk is Gonna Sell More Shares

Between November 2021 and December 2022, Elon Musk sold something close to $38 billion in Tesla shares to his biggest marks, ermmm I mean fans. Most of that went to fund his ill-advised Twitter purchase, the value of which has been cut in half to $20 billion.

In addition to gutting prices on Thursday night, Musk took advantage of the three-day weekend to send out the company’s annual proxy statement. This document had a bombshell in it:

In order to mitigate the risk of forced sales of pledged shares, the Board has a policy that limits pledging of Tesla stock by our directors and executive officers. Pursuant to this policy, directors and executive officers may pledge their stock (exclusive of options, warrants, restricted stock units or other rights to purchase stock) as collateral for loans and investments, provided that the maximum aggregate loan or investment amount collateralized by such pledged stock does not exceed, (i) with respect to our CEO, the lesser of $3.5 billion or twenty-five percent (25%) of the total value of the pledged stock, or (ii) with respect to our directors and officers other than our CEO, fifteen percent (15%) of the total value of the pledged stock.

Previous proxy statements had not contained the above stipulation, so let’s break down what is going on here.

You see, there’s a little trick well-compensated executives and billionaires use to get out of paying capital gains tax on the increased value of shares they hold. They borrow against these positions, using the stock as collateral. These loans are usually over-collateralized at (generally/ish) 25% LTV, meaning you can borrow $250,000 for every $1 million in collateral put up. That loan is taxed at a significantly lower rate than income or capital gains (if at all), and so execs can effectively pre-sell shares without paying taxes until often much, much later.

This cool and good system isn’t without downside. Because the entity who is issuing the personal loan holds rights to shares held as collateral, if the debt is called or the value of the underlying pledged shares (stock price) goes down enough, they can ask for more collateral. This is a Margin Call. If the debtor doesn’t come up with more sweet cash or additional collateral, the creditor can liquidate shares. This margin call forced liquidation has been the source for some very amusing market comedy, with Mike Pearson of Valeant Pharmaceuticals and Bill Hwang of Archegos Capital being some recent examples.

Musk now has a $3.5 billion limit to the amount of debt he can have against his Tesla shares, whereas before, he had none. We do not know the exact amount of margin debt Musk1 has, but we can estimate. Using last year's 10-k along with proxy statements for the past several years, the current value of Musk's stock holdings used as collateral is around $48 billion. Using the standard 25% LTV, that's a $12 billion loan. It could be much less than this, but it's likely much higher than the newly self-imposed $3.5 billion.

At T69C, we’ve studied Musk long enough to know that changes in corporate disclosures, especially those issued after hours before a three-day weekend, aren’t a coincidence. We expect that Musk will use this new “rule” (that he all but certainly gave to himself) as pretext to sell more shares. Time will tell, of course, but don’t you dare say you weren’t warned.

Tesla is Spying on You

Ed is working on a longer piece about the bombshell Reuters piece that dropped last week, but we’d be remiss to leave it out of Meltdown Monday. Long story short, Tesla has been using images from vehicles for AI image tagging, but the scope and range of materials collected are shocking:

In interviews, two former employees said in their normal work duties they were sometimes asked to view images of customers in and around their homes, including inside garages.
“I sometimes wondered if these people know that we're seeing that,” said one.
“I saw some scandalous stuff sometimes, you know, like I did see scenes of intimacy but not nudity,” said another. “And there was just definitely a lot of stuff that like, I wouldn't want anybody to see about my life.”
As an example, this person recalled seeing “embarrassing objects,” such as “certain pieces of laundry, certain sexual wellness items … and just private scenes of life that we really were privy to because the car was charging.”

The story is a must read and we suspect you will hear more about this in the future.

Area Billionaire Shits His Pants

This week’s Twitter-related meltdown was so divine, so perfect, that I’m almost at a loss for words on how to describe it. But let’s try anyways.

If you’re reading this post, you probably have some idea of what Substack is. The blogging platform this very publication is hosted on has had spectacular growth over the past few years. Recently they’ve been adding social features such as chats, intersite linking and recommendations, and some other features that encourage people to spend more time on “Substack” the platform.

Substack isn’t supported by ads, but rather they take a cut of pay for publications that charge readers to access articles. Most recently, however, Substack announced they were introducing a social media/microblogging news feed that looks a lot like the basic setup of Twitter. You can read about it here:

On Substack

Introducing Substack Notes

We started Substack in 2017 because we wanted the internet to be better for writers and readers. We were dismayed with the clickbait and content farms, the listicles and liars, the cheap outrage and culture wars. We thought there could be something better if writers and readers were given more control and treated as a higher priority than advertisers, a…

2 years ago · 2485 likes · 1005 comments · Hamish McKenzie, Chris Best, and Jairaj Sethi

Apparently, this made Musk absolutely furious so he changed Twitter’s API to prevent in-line linking of tweets on Substack posts early last week. He then followed this decision by blocking anyone from retweeting, commenting on, or liking tweets that linked to Substack. Everyone on the internet dumped on Musk for the stupid censorship. A bunch of people who didn’t know much, if anything, about Substack now were keenly interested in checking it out. A huge self own.

The meltdown wasn’t over then.

Matt Taibbi, the journalist Substacker who Musk picked to do his wet fart “Twitter Files” expose, went on Mehdi Hasan’s MSNBC show to (poorly) defend his work, and lick Musk’s boots, the day before Musk blocked Substack on Twitter. Taibbi went on to say he was leaving Twitter, and then Musk stopped following him.

Musk finally addressed the situation in tweet form by stating three easily provable lies. And in a hilarious twist, Twitter’s own “Community Notes” feature corrected the record on his tweet. A+ content all around

10 out of 10 meltdown, would watch again.

Paul Graham Dabs on Elon Musk

I thought I was done with stories for the week, but then Paul Graham, the insufferable Tech Titan, head of Y Combinator and regular Musk Defender, absolutely ethered Musk, who apparently didn’t even realize he was being shit upon. Fantastic.