Best Stocks to Short: Tesla
Why I think one of the best stocks to short is Tesla
Last week, I took an in-depth look at one of my favorite short ideas: Snapchat. This week, I am going to continue the series with Tesla. I hesitated a little before writing this post because this is honestly a 50/50 short at best, and I don't want anyone to get the idea that this is a sure thing. On the other hand, when Tesla goes into the gutter this year I'd love to be able to look back on this post of vindication... so here we are.
To cover my ass: please don't act on any of this, but take it as my opinion on a stock that produces plenty and plenty of opinions.
Tesla: The Business
Tesla makes electric cars. Currently, they sell three models: the Model S full size luxury sedan, the Model X full size crossover, and the Model 3 mid-size luxury sedan. They are also working on a Roadster, although that model is unlikely to sell in any volume. The Model S and X sell for north of $100k (as normally optioned), and the Model 3 is a volume model positioned around $40k.
Sales growth has been robust. As the first mover in the luxury electric car business, Tesla has made a killing. Up until recently, they were essentially the ONLY option if you wanted a fancy electric car. It doesn't hurt that their CEO is the dynamic and extremely PR conscious Elon Musk, who has done a better job of promoting the company than perhaps any CEO in history.
Currently, the company is embroiled in ramp-up issues related to the production of the Model 3 that they have termed "production hell". This is an enormous problem.
Tesla has always been run relatively close to the wire, and investing in a new model is obviously quite expensive. Although over 400,000 people have reserved a Model 3 for $1,000, the company doesn't actually get paid until they start delivering cars. Unfortunately, since production hell is making it difficult to do that, the company is cash-flow negative to an alarming degree. In 2017, Tesla lost $2b, and currently has only $3.5b of cash on hand. Elon Must has said that Tesla will not raise money in 2018. If they did, it would be at disastrous rates (whether in the bond market or stock market).
The success of the company depends on their ability to begin delivering Model 3's in massive quantities, while continuing the sales volume of their higher priced models at the same time.
Tesla: The valuation
Tesla has a famously high valuation. Although the company has in some ways justified this valuation on growth alone, at a current value of $50b the company is neck and neck with global giants that deliver 100x the cars like Ford and GM. The expectation of the valuation goes like this.
A) Elon Musk is a genius - he will not rest until the company grows into its value
B) Current cash flow issues are a temporary hiccup and nothing to be concerned with (just look at the stock - it's gone down a little this year but not much)
C) Tesla has a lock on the electric luxury car market and that lock will continue into the future
Unfortunately, I think all of these assumptions are off.
A) Although Elon Musk is a genius, he has set the company up for an audacious goal that simply isn't possible. They are rushing production on the Model 3 (and STILL missing targets) and making mistakes along the way. The people who are buying the Model 3 are by and large NOT the Musk fanboys who were able to purchase the Model S and X. These are normal, middle class people who expect their car to work every day, no matter what. Tesla has never been great on reliability, and we can only expect these problems to be worse with the Model 3, with a negative affect on demand. To be fair on this point, Musk has said that Model 3 reliability is better than for new product launches in the past, but that is on very limited volume.
B) Perhaps more importantly, the company isn't financially positioned for the rough year they are having and will continue to have in 2018. If they had enough cash in the bank to weather production issues than it wouldn't be a problem, but Musk has essentially bet the farm on the premise that they WILL make their targets for 2018. The production numbers don't make that seem likely.
That brings us to the most important area of concern: C) Competition.
Tesla: The competition
Until now, Tesla has caught the other luxury car manufacturers asleep at the wheel (sorry). What have they been doing, you may ask? Preparing to murder Tesla.
BMW, Porsche, Jaguar and Mercedes all have significant efforts devoted to electric cars, with Porsche having a particularly good competitor nearly ready to go in the Mission e. This car is going to eat the now nearly 10 year old Model S alive. That alone could be the straw that breaks Tesla's very precariously positioned financial back.
On the lower end of the market, Jaguar's iPace, along with other offerings from BMW and Mercedes, present better priced alternatives to the Model 3 in more reliable packages with more established brands.
I am sure Tesla will sell plenty of Model 3s, but what I AM saying is that their epic pace of growth will be slowing.
If everything goes as planned, Tesla will make it through the year just fine. The problem is that there are so many things that could go wrong. They could have a massive recall due to production issues in the Model 3. They could have battery supply issues leading to a significant deficit in deliveries. They could have increased competition significantly hamper their ability to meet growth targets.
Perhaps scariest of all, the economy could go into the shitter, killing car sales across the board. I think it's quite clear that Tesla could not weather something like that right now.