If You’re Short Tesla Stock, You’re Fooling Yourself – Seeking Alpha

6 months ago Comments Off on If You’re Short Tesla Stock, You’re Fooling Yourself – Seeking Alpha

As I wrote in a Seeking Alpha article a few days before the automobile’s launch, the Model 3 is Tesla’s (NASDAQ:TSLA) fulcrum to pivot from one business to another. Everything done before the Model 3 was done because of the Model 3 and everything done after the Model 3 is because of the Model 3. I’m not sure if that was confusing or impactful so to clarify, the Roadster, Model S and Model X were all produced in order to launch the Model 3 as quickly as possible, and everything that follows for Tesla will be on the back of the success of the Model 3.

Click to enlarge

Source: Tech Crunch

Preliminary results are in: Tesla Motors recently announced that pre-orders for its Model 3 are approaching 400,000. That is a number that surprised even many TSLA bulls, and while some bears claim that pre-orders =/= sales, it is nevertheless an encouraging launch for Elon Musk’s pride and joy.

The base Model 3 will sell for an estimated $35k, which does not include a tax credit of $7,500, bringing the price down to $27.5k. But those who place new Model 3 pre-orders are out of luck on the tax credit as it only applies to every car up to the 200,000th one sold. Even at $35k, the Model 3 is a very affordable option.

Now we wait. How many pre-orders will the Model 3 reach before actually going on sale? 750k? A million? More? That remains to be seen, but the fact we are even talking about those figures as possibilities shows just how successful the launch was.

But despite this accomplishment, I am reminded of how many investors are short TSLA. As of March 31st, 2016 about 28% of TSLA’s float was held short according to Yahoo! Finance. You might have guessed by the title of this article that I disagree with these investors. That is true, but not because the bears don’t have valid points.

Tesla’s fundamentals are crap. That is a fact. The company is burning cash like wildfire, has yet to produce any meaningful profits and yet still has a stratospheric valuation of $33 billion! Perhaps looking at these figures serves as rationale to sell TSLA short. A seemingly rational decision.

However, to short shares of TSLA is almost as speculative, if not more speculative, than buying shares of TSLA.

Frequently, short sellers enter a stock that is seen as being unstably propped up by speculative buyers that just want to make a quick buck. Short sellers simply profit when the stock returns back to its fair value. Its equilibrium. The short-seller is essentially betting that the stock market will eventually decide to judge a stock wholly based on its fundamentals. With stocks that eventually come back down to earth, there is normally a downward catalyst that shocks investors out of the euphoria that brought the stock there in the first place. Investors are left wondering why the stock was so high to begin with.

For Tesla, the failure of the Model 3 would surely have been one of those downward catalysts. The exact opposite occurred: the Model 3’s launch affirmed the stock’s lofty valuation. Between now and the moment the Model 3 goes on sale, what downwards catalysts exist that would force the market to evaluate Tesla stock strictly on the fundamentals? I see no imminent events that fit this description.

If You’re Short TSLA…

If you’re short TSLA, maybe you think that the market will “come to its senses” and the stock will plummet. However, the stock has risen 22% over the past 12 months and has only dropped below $200 once in that time span. In other words, no more volatile than your average security. The one event that could have seriously dealt a blow to the stock arrived and only served to give it a boost.

If you’re short TSLA, maybe you think that the company is just an average electric vehicle (“EV”) manufacturer that’s been beaten to the market by many other companies. Where’s the competitive advantage? Aside from technological edge, brand loyalty is by far Tesla’s greatest advantage over other EVs. Tesla has the unique opportunity to be known as THE electric vehicle manufacturer. Other car companies might make EVs, but they make ICE vehicles and hybrids as well. Only one major company exclusively sells EVs, and that’s Tesla. Perhaps you think that’s a moot point. Who cares? Evidently, a lot of people. Pre-orders are through the roof and I guarantee that “Tesla” is the first word that comes to mind for a lot of consumers when you say “electric vehicle”.

If you’re short TSLA, maybe you think that Elon Musk cannot make Tesla into a viable company. At last tally, Musk owned 26.5% of Tesla, worth nearly $9.5 billion. That is an overwhelming portion of his net worth. Personally, I don’t think he would throw away his fortune by casually managing the company as a bystander who cannot be bothered to make the company profitable. Make no mistake, Musk’s goal is to make Tesla into a profitable company, and to say otherwise would be to claim Elon Musk is going to throw away $10 billion for a pet project of his. Not likely.

If you’re short TSLA, you are ignoring or are choosing to ignore the massive potential the company has to change the auto industry and be the head of an EV empire. Maybe fundamentals will suddenly become the most relevant data point to investors, and the stock will crash. Maybe competitors trounce Tesla, which quickly fades into irrelevance. Maybe Elon Musk will run it into the ground. Maybe the stock crashes and burns for some reason or another. But the risk has significantly shifted from buyers of TSLA to the sellers of TSLA.

Tesla has proven that it can produce revenue. The Roadster, Model S, Model X, and likely the Model 3 as well, are proof of this. Profits and cash flow are a matter of slowing down the manufacturing process and bringing down supply costs (e.g. Gigafactory). They have not manifested yet, but it is not hard to see a path to achieving them. As long as nothing significant goes wrong, TSLA’s valuation will likely remain the same or move higher, and it is increasingly looking like the roadblocks are becoming few and far between.

If you’re short TSLA, you’re fooling yourself.


My question to you, the reader, is as follows:

For bears – why are you short TSLA? Perhaps I am the fool?

For bulls – why are you long TSLA? Which bear arguments do you think are crumbling and which ones do you think are still relevant?

Feel free to leave a one-word answer or long-winded rant in the comments section below. Thanks for reading!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

If You’re Short Tesla Stock, You’re Fooling Yourself – Seeking Alpha