The bloodletting among Tesla shorts has become legendary.
Tesla has been shorted for years by some very smart money betting the overvalued shares will tank any moment. At the end of March, short interest was 31.4 million shares. This short interest amounts to 26% of the “float,” which is the number of shares available to trade (shares outstanding minus restricted stock). This is huge!
Yet, at $308 a share, the stock brushes up against its all-time high, giving Tesla a market capitalization of $50 billion, just shy of GM’s $51 billion. But they don’t even compare. In March, GM sold 63 times as many cars in the US as Tesla. Over the past eight years, GM earned $47.1 billion; Tesla lost $2.7 billion.
With this valuation, Tesla has been a logical short. But the bloodletting among Tesla shorts has become legendary. So the Los Angeles Times asked these four short sellers why they’d venture into this trade:
- Mark Spiegel of Stanphyl Capital Management.
- David Rocker, formerly of Rocker Partners.
- Mark Yusko, founder and CIO at Morgan Creek Capital Management.
- Anton Wahlman, former stock analyst who now writes about the auto industry (he said he currently holds no position on Tesla).
And here are seven of their reasons for shorting Tesla:
1. Negative Cash Flows
“If you can’t make money selling a $100,000 car to rich people, how are you going to make money selling a $45,000 car to normal people?” Rocker told The Times. He was referring to the upcoming mass-market Model 3.
“I’m saying they’re going to lose money on every Model 3 they build and sell,” Spiegel said. Based on Tesla’s Q4 2016 earnings report, he figured the combined average selling price for non-leased Model S and X is about $104,000 and the combined average cost of building them about $82,000.
The Model 3 will be smaller, more basic, and with a cheaper battery. There is also hope Tesla can produce several hundred thousand per year, thus getting better prices from suppliers and bringing per-vehicle production costs down. Alas…
“You can cut the price of a car in half, but you can’t cut the cost in half,” Wahlman warned.
2. Competition from the Big Guys
Electric vehicles are still only a tiny fraction of total new vehicle sales in the US. Tesla sold about half of them. In March, according to Autodata, Tesla sold 4,050 vehicles in the US, similar to Porsche. All automakers combined sold 1.56 million new vehicles. This gave Tesla a market share of 0.26%.
But the EV market is growing rapidly and all global automakers have jumped into the fray. Here are some pure EVs already available in the US to compete with Tesla:
- Ford (Focus Electric)
- GM (Bolt)
- Fiat Chrysler (500e)
- Honda (Fit EV)
- Hyundai Ioniq Electric (“soft launch” for now)
- Nissan (Leaf)
- BMW (i3)
- VW (eGolf)
- Mercedes-Benz (B-Class)
And here are some of the pure EVs coming to the US market soon:
- BMW X3 (2019)
- Audi e-tron SUV (2018)
- Aston-Martin RapidE luxury sedan (2018)
- Porsche Mission E sports car (2019)
“Tesla faces a formidable set of competitors, and they’re coming in with guns blazing,” Wahlman told The Times.
“Once the market is flooded with electric vehicles from manufacturers who can cross-subsidize them with profits from their conventional cars, somewhere around 2020 or 2021, Tesla will be driven into bankruptcy,” Spiegel said.
Bankruptcy would require that investors refuse to fund Tesla’s negative cash flows. If it keeps getting new money, it won’t go bankrupt. It’s that simple. So when will investors walk away? More on that in a moment.
“I’m not in the ‘Tesla’s worth zero’ camp,” Yusko said. “But I definitely think that anyone buying at [recent] prices could cause a meaningful impairment to their financial health over the next few years.”
3. Tesla’s vanishing tax credits
The federal tax credit of $7,500 that EV buyers currently get is limited to 200,000 vehicles for each automaker. Once that automaker hits that point, tax credits are reduced and then phased out.
Of all automakers, Tesla is closest to the 200,000 mark. Under its current production goals, the tax credits for its cars could start declining in 2018. This would give competitors, whose customers still get the full tax credit, a major advantage.
About 370,000 folks put down a refundable $1,000 deposit on Tesla’s Model 3, perhaps figuring they’d get the $7,500 tax credit. But as it stands, many won’t. Rocker thinks that this is going to be an issue. The refundable deposit “commits them to nothing,” he said. Those that don’t get the tax credit may just ask for their money back and buy an EV that is still eligible for the credit.
4. The Question of patent protection
Tesla has made its patents available to all comers, thus lowering its patent protections against competitors. Also, the key part of an EV, the battery, is produced by suppliers; they, and not Tesla, own the intellectual property. This is true for all automakers. But Tesla might still be closely guarding crucial trade secrets that are not patented.
5. Musk’s distractions from his day job
Musk has a lot of irons in the fire: Tesla, SpaceX (with which he wants to build a colony on Mars or something), solar-panel installer SolarCity which Tesla bailed out last year; projects ranging from artificial intelligence to tunnel digging; venture capital activities….
“He’s all over the map, from tunneling to flights to Mars to solar roof tiles,” Rocker said. These announcements have the effect of boosting Tesla’s stock: “It’s ‘Let’s get the acolytes excited. Implant in the brain! Let’s buy Tesla stock!’”
But it’s mightily distracting for a CEO to be involved in all these projects at the same time, the short sellers said. They also mentioned that top executives continue to leave Tesla, including CFO Jason Wheeler in February, which is a further distraction.
6. Execution risk
“Investing is all about possibility and probability,” Yusko said. “Is it possible that Tesla will produce 500,000 cars in the next two or three years? Yes. Is it probable? No.”
Tesla has missed many deadlines and goals, and quality problems cropped up in early production models. As Tesla is trying to make the transition to a mass-market automaker, execution risk will grow since mass-market customers are less forgiving.
7. Investor fatigue
Having lost money in every one of its 10 years of existence, Tesla asks investors regularly for more money to fill the new holes. In March, it got $1.2 billion. In May last year, it got $1.5 billion. Tesla will need many more billions to scale up production and to digest the losses. Tesla has been ingenious in this department. But when will investors get tired of it?
“We’re awfully close to the point where people wake up and realize these guys are seriously diluting our equity” with new stock and convertible bond issues, Yusko said. According to The Times, Yusko “is looking for the moment when the true believers begin to lose faith.”
But the true believers haven’t lost faith yet, which has been brutal for short sellers. The stock’s ascent has defied their razor-sharp logic, despite major sell-offs in between. Someday, some of them will be on target. Until then, the simple fact is that a stock that is irrationally overvalued no longer faces rational limits and can therefore become even more irrationally overvalued. This principle doesn’t hold forever, but it holds long enough to cause maximum pain. So don’t try this at home.
“It’s either one of the great Ponzi schemes of all time, or it’s all going to work out,” mused Mike Jackson, CEO of AutoNation, about Tesla’s share price. “It’s totally inexplicable,” he said. But it’s not inexplicable at all. Read… What Tesla’s “Inexplicable” “Ponzi Scheme” Valuation Says about the Stock Market
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