Chris’ note: Last month, Tesla CEO Elon Musk sent out a tweet slamming bitcoin for its intensive energy use. Since then, bitcoin is down as much as 46%.
Oddly, Musk’s tweet came just three months after he disclosed that Tesla had swapped $1.5 billion of its cash reserves for bitcoin. On the surface at least, this flip-flop doesn’t make sense. It’s wiped hundreds of millions of dollars off the value of Tesla’s bitcoin holdings.
But it makes perfect sense once you understand the likely reason behind it. As colleague and former Wall Street trader Jason Bodner reveals below, it’s got to do with one of the hottest investment trends in the stock market right now.
On May 12, Tesla CEO Elon Musk shocked the crypto markets with this tweet…
Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.
Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost of the environment.
Tesla will not be selling any Bitcoin and we intend to use it for transactions as soon as mining transitions to more sustainable energy. We are also looking at other cryptocurrencies that use >1% of Bitcoin’s energy/transaction.
What followed was a crypto reckoning. Bitcoin and many other cryptocurrencies took a wicked tumble. Bitcoin fell 50% from its highs. It wiped more than $1 trillion in wealth from the market in a week.
Here’s the strange part…
This came just months after Musk all but assured a bright crypto future for Tesla. The electric vehicle company disclosed a $1.5 billion allocation to bitcoin on its balance sheet in February.
But perhaps even more important, Tesla said it would accept bitcoin as payment for its cars.
That was like gas on a fire for bitcoin’s price. From that announcement in March, bitcoin rocketed 71% higher to a peak price of nearly $65,000. Tesla’s initial $1.5 billion stake was suddenly worth over $2.5 billion. Pretty convenient!
But then came this tweet. And bitcoin, which had already weakened, fell all the way back down to $32,536, around where Tesla first bought it… then even lower.
You might read this and ask – why on Earth would Musk deliberately jeopardize his own company’s balance sheet?
Bitcoin does use quite a bit of energy. And the debate over that energy use has picked up in recent months.
But is this really enough for Musk to suddenly flip-flop on bitcoin… And purposely tank his own holdings?
I don’t think so.
I think there’s something bigger going on that few people are talking about. It could point to an investment trend that’s just getting started… and has a huge long-term runway.
The best part is, you don’t need crypto know-how to profit from this trend. The companies powering it trade on the stock market.
Today, I’ll share what this trend is, and why I’m excited about its outlook over the next four to eight years.
But first, let’s answer the big question… Why did Musk really send that tweet?
How Tesla’s Business Really Works
Full disclosure: I’m a shareholder of TSLA in personal or managed accounts. That’s given me a pretty strong understanding of how its business works.
Regular readers know my research revolves around data. It’s important for me to know where a company’s revenues come from, if it’s growing, and if it’s profitable.
Don’t get me wrong. I’m bullish on TSLA.
But there’s a reason some smart people bet against the company. For example, Michael Burry of The Big Short fame is reportedly short about $530 million worth of TSLA.
Tesla’s vehicle and battery business isn’t actually very profitable on its own…
The company heavily relies on federal environmental tax credits to keep it in the black.
The U.S. government distributes tax credits to incentivize producing environmentally friendly vehicles.
Because Tesla’s cars are electric, they fulfill emissions and fuel economy standards by a wider margin than any traditional automaker. That earns the company lots of federal tax credits.
It then sells excess credits to other automakers that need them.
Tesla earned $518 million from selling those credits last quarter alone. That’s up 46% from the same time last year.
Selling credits made up 7% of its overall revenues. It made up more than four times that quarter’s net profit of $104 million. And Tesla projects it will earn $1 billion from these tax credits a year from now.
Clearly, these credits are important to Tesla’s bottom line. Much more important than, say, $1.5 billion worth of bitcoin. Without them, its quarterly earnings reports won’t look nearly as good.
What does this have to do with Musk’s recent about-face on bitcoin? Here’s my theory…
Tesla’s Green Motivations
Bitcoin miners use graphics processing units (GPUs) to increase their computing power. The more they grind away, wired up to electrical sources, the more bitcoin they earn.
That activity consumes an annualized 145 terawatt-hours of energy per year. That’s 0.65% of the world’s total energy consumption.
And, as with most of our electricity, mining requires coal-fired power plants and other fossil fuels.
So isn’t it possible Tesla’s involvement in bitcoin attracted criticism from the very government that grants Tesla’s environmental tax credits?
If public perception is that Tesla supports fossil-fuel burning from bitcoin mining, that calls its “green” emissions into question.
Let’s be real: Neither Tesla nor Musk will admit this. I can only speculate now, but picture this…
Let’s say Tesla and the feds came to some agreement…
Tesla can keep both its tax credits and its bitcoin holdings as long as it no longer accepts bitcoin as payment. Why? Because legitimizing bitcoin as acceptable currency encourages further bitcoin mining. That means more energy consumption.
I believe that’s why Musk tweeted what he did.
While that’s not good news for bitcoin fans… it’s great news for investors in another market opportunity: high-ranking environmental, social, and governance (ESG) companies.
How We’ll Benefit
With President Biden committed to steering the U.S. towards using mainly renewable energy, companies with a “green” edge are rocketing higher.
Companies get scored on these three criteria: environmental, social, and governance. The higher the score, the more environmentally friendly and sustainable a company is.
High-scoring ESG companies have been some of the hottest investments of the past year. Since the pandemic tanked stocks last year, the Vanguard ESG U.S. Stock ETF (ESGV) – a basket of high-ranking ESG companies – has skyrocketed 90% higher.
But ESGs aren’t the only environmentally friendly companies getting a big boost right now. Renewable-energy-focused companies have done even better.
The Invesco Solar ETF (TAN) is an exchange-traded fund focused entirely on solar and renewable energy (a good chunk of Tesla’s business). It’s returned 247% since the pandemic bottom.
Now, if you’re not sold on my idea for why Tesla made its shocking move with bitcoin, consider this…
As of last Thursday, Tesla is part of ESGV. This places it in investors’ portfolios alongside other ESG companies.
Clearly, it’s in Tesla’s best interest to prove it meets ESG standards.
No one can say for sure why Tesla decided to stop accepting bitcoin as payment. But it makes sense if the reason is tied to the company’s ESG and renewable energy ambitions.
And that’s great news for renewable energy stocks and high-ranking ESG companies. You can add ESGV and TAN to your portfolio for broad exposure to this trend.
Personally, I’m not yet sold on bitcoin, so I’m not really concerned with what this all means for it.
But I’ve spent my career diving deep into stocks and understanding them like the back of my hand. So no matter where the crypto market goes, or what Elon Musk tweets, my subscribers will take comfort because they’re sitting in the best outlier companies out there.
As a matter of fact, one of the biggest renewable energy winners in the market is in my Outlier Investor model portfolio. It’s up 346% since my recommendation in June 2019.
I’m always on the hunt for other stocks in the space with similar potential. And my proprietary stock-picking system shows me where the best opportunities are.
I recently showed off this system in a special presentation.
Editor, Outlier Investor