Notice of Index Modifications: Ferrari ETPs

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Sandeep Rao

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Why Investors are Long Tesla Despite the Odds

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In the course of Tesla’s annual shareholders’ meeting on the 13th of June, shareholders once again approved the “all or nothing” pay package deal to Tesla CEO Elon Musk. Originally granted to Musk in 2018 and struck down by the court system in Delaware – where the company is incorporated – on account of the deal being formulated by a board that didn’t seem to be wholly independent of Musk, the re-approved deal isn’t entirely out of the woods yet in terms of a potential for another legal challenge.

The deal also has the potential to significantly affect the company’s bottomline.

Breaking Down the Deal

The pay package deal awards Musk the option to be given 304 million shares at $23.33 per share. At 3.19 billion shares outstanding, the deal hands over just 0.1% of the company’s shares available to Musk, who already owns around 13% of the company’s shares. Overall, it adds virtually nothing in terms of control of the company. However, in terms of cost to the company, it’s massively significant.

As of the 19th of June, Tesla’s share price closed at $184.86, which is nearly 8 times the offered price of the shares in his pay package deal. If Elon had exercised his right in its entirety as of yesterday, the company will have to expend nearly $49.1 billion to grant him his right. Presently, the company’s Trailing Twelve Month (TTM) free cash flow stands at $1.38 billion. The company’s average cash flow position over the past three full calendar years is at $5.13 billion. In the event of the options being exercised yesterday, the company would have to commit nearly $56.2 billion in resources to purchase the stocks. That amounts to nearly 11 times the 3-year average cash flow position and 41 times the TTM cash flow position. If Musk were to exercise his right, the resulting strain on the company’s net financial reserves would be intense. In all likelihood, the company will have to finance its obligations. In the TTM, the company has issued $4.71 billion in debt. The required amount of fresh debt to be issued — absent all other purposes for issuing debt — would be nearly 12 times that.

This is precisely why many major shareholders felt obligated to say “No” to the deal; it has the potential to be a sword perpetually hanging over the company as per the will of Musk, who became a part of Tesla in 2004 by investing $6.5 million to become both its largest shareholder and the chairman of its board. Musk went on to become the CEO of the company in late 2008 after a series of departures and has received no cash salary since.

The proverbial sword is another cause for concern for institutional shareholders and associated parties such as index providers who create the basis for ETF-driven investment into the company’s stock. Tesla was inducted into the Nasdaq-100 in 2013 while it took till 2020 for the stock to be inducted in the S&P 500. The delay by the latter is generally considered to be due to the fact that the stock had long been subjected to overvaluation — and the resulting volatility — at least partially due to the stock being “memed” as being the next edge in the automotive industry. The potential for the deal being detrimental to the company’s finances at a time when the company’s global market share is steadily eroding might become grounds for institutional shareholders to seek means to pivot out of the stock into other alternatives.

“Magnificent Seven” and Investor Behaviour

Over the past year or so, investors have been increasingly fixated on a steadily-decreasing number of stocks. As a result, only a small number of stocks have been rising on the backs of rising buy-ins at the expense of nearly every other stock in the U.S. equity universe. At present, the highest-favoured stocks have been the “Magnificent Seven” of which Tesla is a part of. As of the 15th of June, this group of seven collectively accounted for $15 trillion in market capitalization, with a $2 trillion surge seen over the past two months alone. Together, the valuation equals well over half of the U.S. Gross Domestic Product in 2024.

Of the “Seven”, Tesla decidedly lies in the lower spectrum of performers. As of the 17th of June, the stock is down 25% in the Year to Date, with Wells Fargo’s analysts famously declaring nearly three months ago that the company is now “a growth company with no growth”. While it had a “first mover advantage” in the EV space, Tesla is no longer alone here and is dealing with a damaging price war with other manufacturers along with the prospect of heightened tariffs affecting exports of its China-made vehicles.

What does work to an extent in making Tesla a member of the “Magnificent Seven” is Elon Musk, whose acerbic and staccato commentary on Twitter (now X) has helped him – and his companies – achieve “meme” potential and a certain level of brand equity in the eyes of some investors, regardless of advances made by the competition.

This is exhibited even in Leverage Shares’ products (referred to as “ETPs”) which are built on top of Tesla stock and traded vigorously in various bourses across Europe. These ETPs come with a leverage factor – which determines the daily return magnification – of 1X, 2X or 3X in either direction, i.e. “leveraged” which signify a “long” or “inverse” which signify a “short”. Since the start of 2023 till this past week, turnover trends indicate a distinct flavour for the “long” versus the “short”.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Source: Leverage Shares

ETPs with a leverage factor greater than 1 are tactical instruments designed to take advantage of trajectories in the short term. Through most of 2023, it can be seen that turnover favoured the “long” over the “short” in tune with stock performance. The pattern breaks, however, in the final month of 2023: with the stock trending downwards since then and through most of the current year, the bulk of investor conviction shifted towards piling into the “long”. While there are signs of a downtrend favouring the “short” after the shareholders meeting, the “long” continues to stay strong.

It should come as no surprise that in the earlier part of 2023, turnover performance – which measures the shift in 15-day average rolling turnover on a daily basis – of the “long” ETPs significantly outpaced that of the “short” ETPs. What’s significant is that the magnitude of turnover remained intact despite signs of the stock flagging.

Source: Leverage Shares

This is a prime example of investor conviction running strong despite the fact that tactical instruments aren’t to be used the same way as stocks are.

Now, since leverage factors greater than 1 magnify the trajectory of the ticker being tracked based on the direction, the “long” ETPs – despite momentary “snapbacks” in 2024 so far – have been largely unprofitable when compared to the “short” ETPs but more profitable than holding the stock itself.

Source: Leverage Shares

Tesla stock tends to “snapback” pretty powerfully since it is a part of the “Magnificent Seven”, which continues to attract inflows as a whole. However, the downtrend remains resolute which implies that investor conviction in the “long” tactical instruments tends to cost them on a long-term basis. On the other hand, investor conviction in the “short” – while lower – has remained fairly consistent and relatively rewarding.

In Conclusion

Much like before, Tesla continues to remain at a crossroads with little by way of actual encouraging forward outlook at present. The deal does little to lift this outlook and its membership in the “Magnificent Seven” comes with diminishing returns, as exemplified by the stock’s YTD performance.

While it isn’t unusual for an investor to have conviction in a stock despite the odds, the tactical instrument space is a different beast. It literally pays to consider trajectories for maximizing profit potential by shifting between directions and consider ETPs to be an entirely separate matter from actual stock ownership. In addition to the Tesla ETPs highlighted here, professional investors can also consider making a play on the entirety of the “Magnificent Seven” via the 5x Long Magnificent 7 ETP, which offers magnified exposure to the upside of a basket containing all seven “Magnificent Seven” stocks in equal weights, and the -3x Short Magnificent 7 ETP, which does the same albeit on the downside.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.

By clicking you agree to the Terms and Conditions displayed.