In today’s Exponential Investor

  • That time of the year
  • Tesla’s trading platform
  • JP Morgan’s new fund

It’s that time of the year. That exciting, wonderful time when we find out which companies you want to snog, marry or avoid.

This is all predicated on the release of company earnings after first quarter numbers of 2021 start to officially roll in.

That means if you’ve got a penny or two tied up in the market, get ready for a wild couple of weeks.

Also, just a warning: what you think might happen based on the earnings results is most likely the thing that won’t happen.

In other words, conventional market understanding would lead you to believe good results will equal a bump higher in the stock price, and poor results will lead to a knock lower.

But we’re in 2021 and conventional understanding doesn’t always necessarily apply.

Tesla sold the dip?

Tesla was one of the first headline-grabbing companies to go public with its results this week.

The notable story which everyone has been all over is the fact Tesla sold 10% of its bitcoin holdings.

The company’s quarterly report notes it had $1.2 billion of net cash outflow relating to bitcoin purchases in Q1. But then it also notes Tesla had $272 million of “Proceeds from sales of digital assets”.

Still, as at 31 March 2021, Tesla still held $1.331 billion of digital assets (read: bitcoin) on its balance sheet.

So, that means Tesla has made a tidy little profit from its current foray into cryptocurrency. Good on them.

However, what’s fascinating about that is its total net income for the period was just $464 million. Now if you strip out the $272 million from the sale of bitcoin, that leaves $192 million, which would have been a 35% fall in net income from the previous quarter ending 31 December 2020.

When you look across the numbers from the report, you see that almost every quarter through 2020 Tesla grew automotive sales, grew free cash flow and bolstered its cash balance.

Then this first quarter, automotive sales fell away compared to the last quarter of 2020. Total revenues fell too. Operating expense rose. And while yes, net income may have risen, we know much of that was thanks to clipping off some bitcoin.

Year on year, the figures are better. But compared to the quarter prior, Tesla is actually worse off.

So, while the company’s bitcoin position will grab some headlines, and its year-on-year comparisons might get the big funds nice and happy, the reality is that the trend from quarter to quarter is down.

The expectation is that the market sees the truth there and reflects Tesla’s price accordingly.

Here’s the kicker to all this… At a market cap of around $700 billion, how much growth do you think Tesla has? How much market share do you expect it’ll capture in the next few years? Or will Tesla face increasingly stiff competition from other car makers in the US, Korea, Japan and Europe?

Have you seen the upcoming Audi A6 EV? Have you seen the new Hyundai Ioniq 5 EV? Have you seen the new Volkswagen ID.4?

Do yourself a favour and check them all out. That’s just a slither of the competition that Tesla is facing. Yes, the car market is massive. Yes, Tesla will have its share of it. But don’t expect it to be the dominant player.

First-mover advantage, yes. Long-term market domination, in my view, no.

Taking Tesla’s lead

What’s also interesting about Tesla’s earnings is the fact that after so much hype around its bitcoin purchases, it converted a big chunk back to fiat money.

The irony is the point of the purchase to start with was to avoid devaluation of its cash holdings.

Either way, it does go some way to remind us that while companies like Tesla adopting bitcoin to their balance sheet is important, it’s not the only thing that’s going to drive the market and adoption.

They will always be interested first and foremost in returns for shareholders and selling their product. They are after all, a car company, not a crypto trading company.

Likewise, when you hear that JP Morgan is sniffing about bitcoin again, make sure to temper your excitement.

The talk is JP Morgan may be looking to offer an actively managed bitcoin fund to its clients.

Err, what?

Let’s just unpack that for a moment. JP Morgan is going to offer a fund to buy an asset that you can buy yourself with ease at very little cost, and it’ll charge a management fee for the effort.

I guess JP Morgan’s take is that by being actively managed it’ll be trading in and out of the bitcoin positions to add “alpha” to the fund. At least I’m sure that is how it’d sell it. The real reason is just another way it can earn more management fees from suckers.

The best play for bitcoin (historically) has been to buy and hold (or “hodl” as is the common vernacular in crypto circles).

Hence, what’s the point of an actively managed fund?

My take, there’s no point at all. In fact, if JP Morgan does launch this thing, I think you’d have to be a bit dim to take it up.

The upside though is the fact JP Morgan is even mooting this idea. It wasn’t that long ago that bitcoin was a scam to the powers that be at JP Morgan. CEO Jamie Dimon even once said he’d fire anyone caught trading it for the company.

I guess they all come around to their senses sooner or later.


Sam Volkering
Editor, Exponential Investor