Since late last year, short sellers have gotten completely destroyed by Tesla.
A company that looked wildly overvalued and ripe for a correction at a $US30 billion market cap has watched its stock price surge more than 60% over the first half of 2017.
The market cap is now more than $US50 billion, making Tesla — a largely profitless company that sold less than 80,000 cars in 2016 and undertook an ill-advised, debt-laden acquisition of SolarCity — bigger than General Motors, Ford, and Fiat Chrysler Automobiles.
Always a popular short, for obvious reasons (“It’s the volatility, stupid!”), a decent amount of Tesla’s 2017 rally could be chalked up to bearish investors capitulating and covering their positions.
But with the stock at $US373 and in probable bubble territory, short interest will undoubtedly return. Tesla has so much execution risk ahead that assuming it will truly be worth $US60 billion in the future is a far more precarious bet than assuming it will be worth basically zero, absent the value of its assets and intellectual property (its present financials and appetites for capital raises and cash burning point to that).
But here’s the thing: shorting Tesla is a waste of time. As much as being long Tesla is an emotional proposition, couched in a largely unreal story of a vast disruption of the entire global car business by a single, small company, so is the converse. Wanting Tesla to collapse is simply a bleak, reactive counter-narrative.
Everything would be better for Tesla if it were fairly valued. Elon Musk and his management team would be more disciplined, resisting cockamamie ideas, such as hammering the forthcoming Model 3 mass-market vehicle into production without first proving that the manufacturing process is effective and building the Model Y compact SUV on a completely different platform at a brand-new, as-yet-un-built factory.
Undermining the traditional auto industry
Tesla’s story is also undermining the traditional auto industry, putting pressure on boards to shake up management teams that can’t articulate a go-go tale of high-tech disruption to boost stock prices, while at the same time running highly profitable businesses that are minting routine record profits while Tesla hemorrhages money.
But with a booming Tesla stock price, all bets are off. It would be dumb for Tesla not to take advantage of the markets’ obvious confusion and desperate hope. When the party is awesome, you want to keep it going.
The shorts have always been right about Tesla, but it hasn’t mattered. They were right when it was just a car company selling a tiny number of cars and making no money. They were right when it became an energy storage company. They were right when it rescued SolarCity.
Investing in insanity
This is the surreality of taking a emotional desire to watch Tesla flop and layering it with rational analysis. It’s almost the definition of wanton insanity. Tesla falls back to Earth only when its story hits an inflection point. Missing its yearly guidance and merging with SolarCity in 2016 should have vindicated the shorts, but it didn’t, and so anybody who wants Tesla to slide now needs to wait for something really bad to happen.
Tesla keeps upping the ante on really bad. Nothing in its history of generally awful execution has held shares down for long. The company is likely at a point now where its intrinsic flaws are no longer much of a threat.
That’s why shorting the carmaker is useless. Only an external shock will take Tesla down into bearish territory. That shock is coming. When the auto sales cycle turns, Tesla will suffer like everybody else, and because it has stretched into new lines of business that also have economic-risk exposure, it will be juggling more balls than a GM or a Ford.
The market logic of shorting is that overvalued companies should be identified — and those who identify them should be rewarded. Tesla has been an exception to that process because of its epic, once-a-century story. Investors have serially underestimated the value of this — and underestimated the degree to which un-savvy newer investor have been willing to accept comparisons between Tesla, at base a car company, and mega-growth tech plays such as Apple and Amazon.
Those investors have been willing to forgive Tesla for being profitless for 13 years. What the shorts don’t understand is that the patience of the Tesla bulls is endless, and their capacity for devising ingenious new storylines is inexhaustible. Very few companies are simply beloved, in the way that Tesla is. Shorting that kind of thing is like shorting romance or sunshine. Why bother?
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