In a recent essay by Linette Lopez for Business Insider, the financial stability and future of Elon Musk, the second-richest man on the planet, are scrutinized. From 2019 to 2022, Musk appeared to be on an unstoppable winning streak, with Tesla‘s profitability soaring and SpaceX‘s rockets capturing public imagination. However, Lopez suggests that Musk’s streak of success might be waning, as indicated by mounting financial challenges in a high-interest financial environment.
The Chinese Tesla Rescue
Lopez recounts Musk’s past escapades, notably the 2018 crisis at Tesla, where Musk’s behavior became increasingly erratic under pressure. His tendency to lash out during financially stressful times, especially on Twitter, is highlighted as a recurring pattern. The turning point for Tesla came with the construction of the Shanghai Gigafactory, a project expedited by the Chinese Communist Party, which was crucial in transforming Tesla into a profitable entity.
Lopez points out that Tesla would not have been able to produce so many cars so cheaply without the factory in China. This would not have made Tesla profitable, and the share price would not have exploded. This, in turn, has made Musk rich on paper. It was China-made wealth.
The Twitter Bet
However, the essay posits that Musk might be pushing his luck too far. In October 2022, Elon Musk closed his purchase of Twitter, which he soon rebranded as X. The Twitter acquisition has been fraught with controversies and financial burdens. The platform is struggling with debt and operational challenges. And it runs out of cash, putting additional strain on Musk’s financial empire. Despite being immensely wealthy, Musk is described as being “cash poor,” with a significant portion of his Tesla shares pledged as collateral against personal debts.
Lopez also draws a quite possible bankruptcy scenario for Twitter (now called “X”) where the banks involved could lose a lot of money. Such a bankruptcy would further drag down Tesla shares, which serve as collateral for loans. This would further damage Musk’s ability to finance his other companies by selling Tesla shares.
The Unbearable Interest Burden
Lopez argues that Musk’s current predicament is exacerbated by the economic environment, with rising interest rates increasing the cost of servicing debts. Tesla‘s market share in the EV sector is shrinking amidst growing competition, and its profitability is under threat due to price cuts and a lack of new products. As profitability falls, so does the share price and thus the opportunity for Musk to raise cash by selling or buying Tesla shares. He needs a lot of cash to pay the interest on the existing loans.
The days of cheap money are over, and the loan interest payments are swallowing up a lot of money, of which there is already very little.
The analysis concludes that Musk’s financial empire is interconnected, and problems in one area, like Twitter, could have cascading effects on his other ventures. The possibility of Twitter going bankrupt is discussed as a potential outcome, raising questions about Musk’s ability to sustain his business empire amidst these challenges.
The Conclusion
In summary, Lopez’s essay in Business Insider paints a picture of Elon Musk as a visionary entrepreneur who might be facing a convergence of financial and operational challenges, questioning whether his luck — and cash reserves — are running out. In fact, Musk would not be the first tycoon to be brought down by high-interest rates. Only recently, Rene Benko‘s Signa Group, one of Europe’s largest real estate developers, had to file for bankruptcy due to a lack of funds.
Read more about the collapse of Rene Benko and his Signa Group.
A collapse of Twitter could be the domino that causes the Musk empire to collapse. Let’s wait and see!