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The Perils of Short Selling: Tesla (Motors) Edition


Back in September 2012, Telsa CEO Elon Musk told Fox Business News that there was a "tsunami of hurt" in store for short sellers of TSLA stock and that "I would advise people to exit while there is time" (view footage here). TSLA shares were then trading at just under $29.50/share and the company was producing between 40 and 80 vehicles per week from its Fremont factory. Well, how prescient Musk's prediction turned out to be, to put it mildly. TSLA stock now trades at close to $370/share, or 12.5X higher, representing a CAGR of 66% over the nearly 5-year period since that interview. Meanwhile, the company in its latest shareholder letter (see full letter here) predicted that production of the Model 3 mass market vehicle would reach 5,000 per week "at some point in 2017" and 10,000 per week in 2018.

In the Q3 2012 quarter Tesla's revenue was just $50 million, GAAP net loss was $111 million and the company's market cap was approximately $3.4 billion (based on 114 million shares then issued and outstanding). Fast forward to today and the market cap stands at a gigantic $60.7 billion (based on 163 million shares issued and outstanding). In addition, in the Q1 2017 quarter revenue was $2.7 billion (54X that of Q3 2012) and GAAP net loss was nearly $400 million (or $330 million excluding non-controlling interests). Note also that an additional 12.7 million shares are potentially issuable pursuant to stock-based grants, convertible notes and warrants; if these were added to the existing common share count, Tesla's market cap would be about $65 billion.

In sum, the TSLA short trade has been a veritable "widow-maker" during the past 5 years. A what, you ask?


Frankly, we like Tesla as a company and Musk as a CEO. Any chief executive who is willing to haul a sleeping bag into the factory to be on-call on the production line 24/7 is a seriously committed CEO (see details here). No way Mary Barra of GM is doing that. We even happen to share a birthday with Elon (he's several years older). And Tesla's vehicles are quite beautiful to behold. The Model 3 is particularly attractive--frankly, we covet one:

So, in consideration of all of the foregoing, we did last, we are now officially short TSLA stock.

SAY WUH BRAH???? Allow us to explain:

1. We were already long GM, the most undervalued automaker and, in fact, the cheapest profitable company in the entire S&P 500 (with a P/E under 6X), and wanted to partially hedge the position. While we are confident that GM will be a good investment going forward, markets are currently richly valued. If there were to be a correction, it is likely that stocks of the high-fliers of recent years, such as Tesla, would suffer disproportionately vis-a-vis stodgy, high dividend-yielders such as GM.

2. No company is worth an infinite amount, no matter how great, even Tesla. The company's shares now trade at a mind-boggling 110X the highest earnings estimate of any analyst for 2018 (when Model 3 production is supposed to be ramped up), and the fully-diluted market cap of $65 billion is over 3X the mean estimate and 4.4X the low estimate for 2018 revenues, versus GM at just 0.33X their mean 2018 revenue estimate, and this despite GM being highly profitable and TSLA highly unprofitable (see full TSLA estimates here and full GM estimates here). Below are Tesla's current analyst estimates for sales and earnings:

3. Elon Musk recently stated the following: "I do believe this market cap is higher than we have any right to deserve.... We’re a money losing company" (source here). So it's not just us saying it, it's Musk himself. Quite a contrast with the state of play in September 2012, referenced above. When a CEO of a large company says publicly that his stock is overvalued, investors should probably listen.

4. While admittedly a genius, Musk has massive demands on his time, meaning he cannot always devote his full attention to Tesla. Musk must also apportion time each week to being the CEO of SpaceX, his first love (he joined Tesla after it was already formed and several years after he founded SpaceX). He also regularly devotes time to other non-Tesla activities such as the Hyperloop (see here), a brain-computer interface thing called Neuralink (see here) and a traffic-circumventing entity called the Boring Company (see here), not to mention cooking up plans "to colonize Mars and save humanity" (see here). Oh, and he also has to attend to romancing his new girlfriend, who folks may perhaps have heard of:

And not to mention that he has five (yes, five) sons by his first wife to look after (see here re his educational plans). This is one seriously busy guy. You'd think he'd need Ambien or something to deal with all of the stress, a la Tiger. Oh, wait...

Wish us luck! (We hope we won't need it.)

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