If You’ve Got the Guts, Short Tesla

Big bets make big money in the market. George Soros bet big back in 1992 against the British Pound. Legend has it he made US$1.5 billion from it.

John Paulson bet big against subprime mortgages in 2007. This trade made his hedge fund around US$15 billion. The other aspect of Paulson’s trade was he bet against the tide. Everyone on Wall St thought he was crazy, and wrong…until he was right.

Now he’s an investment legend.

In 1907 Jesse Livermore predicted the stock market crash. He made around US$3 mln. That’s about US$70 mln in today’s dollars.

And in 1987 Paul Tudor Jones predicted and profited from Black Monday. He also shorted the market and made around US$100 mln. While he wasn’t alone in predicting Black Monday, he was the one who had the guts to bet big.

Then there’s Jim Chanos. Chanos started investigating a company back in 2000 by the name of Enron. He saw a lot of bad things in his analysis. He even alerted the media. And of course he shorted the life out of Enron.

And as you’re well aware, he was right. At the time Enron had around US$65 billion in assets. It was the biggest bankruptcy ever at the time. Even today it’s still the 6th biggest bankruptcy of all time.

Chanos made a killing off Enron. And also goes down in folklore as an investing genius.

What you’ll notice is most of these big bets had big results. That’s the risk/reward trade-off in play. Bet big, win big — but if it all goes wrong, lose big too.

You’ll also notice that most of them involve the investor betting against the market.

While almost everyone else was adamant these guys were wrong, they stuck to their guns. They went against the tide. And they were right. It takes guts to buck the trend. To stand up and disagree with the masses isn’t an easy thing to do.

Bets like these are common throughout history. These are just a few examples. There are plenty more. And in the coming future there will be more again. There will be investors that bet against a stock or market and make a killing.

Will that be you? It could be. You might not have a hedge fund behind you like Paulson. Obviously that means if you do make a call and are right, your gains won’t be in the billons. But that doesn’t mean you can’t still profit from it. Maybe even make life-changing profits from it.

So what’s next? Where’s the next big opportunity to make a killing by betting against a stock or market?

Well I think the next big opportunity is Tesla Motors [NASDAQ:TSLA].

Tesla makes the Model S and Model X cars. According to their latest Annual Report (31 December 2015) they’ve delivered 107,000 Model S cars since launch.

Their next step is to make and deliver a new Model 3 in ‘late 2017’.

Extreme production ramp costs money

This year the company aims to deliver 80,000–90,000 new vehicles. They’re also aiming to hit a 500,000-unit build plan by 2018. That’s just 18 months away, mind you. The company freely admits this ‘will likely require some additional capital’.

Model S production in Q1 this year was 12,851 cars. Model X production of 2,659 was ‘insufficient to meet our projected levels of deliveries.’ Q2 wasn’t much better, with 9,745 Model S and 4,625 Model X deliveries.

I get the felling Tesla’s suffering from a ‘hype hangover’.

So in the first half of the year total deliveries were 29,880. They need to deliver 50,000 to 60,000 in the second half of the year to hit their projections. And they want to do 500,000 in a year and a half?

Tesla blames the missed targets on ‘extreme production ramp’. This it seems is the carrot dangling in front of the donkey. It implies that soon enough production and deliveries will go parabolic.

But will they?

Having a look through Tesla’s Q1 update, there are a few things that don’t make sense to me.

It states, ‘Cash and cash equivalents rose to $1.44 billion at quarter end aided by more effective cash management and $430 mln drawn against our asset based credit line.’

For a start, how bad was their cash management before? And in my book that sounds like they’re drawing debt to boost the balance sheet. Isn’t that just like taking cash out of an ATM with your credit card?

The announcement also says that, ‘Almost all Model 3 reservations received on the last day of Q1 are recorded as receivables, pending cash receipt from various credit cards banks. April cash receipts for vehicles in transit at quarter end plus Model 3 reservation deposits allowed us to pay back allowed us to pay back $350 mln on the asset based line.

That’s fine if the deposits are non-refundable. But they’re not.

The first week of the Model 3 launch was a success. That week resulted in Tesla taking 325,000 deposits. At US$1,000 per deposit that equates to $325 mln in deposits. Note: Model 3 deposits are fully refundable if the customer chooses to cancel their order.

So they used $325 mln to pay back part of $350 mln in debt. But aren’t they still liable for $325 mln of customer deposits? That’s if everyone cancels their order. That’s money that Tesla would need to find and pay back…right?

Using customer deposits supposedly for a new model to pay back debt. That’s doesn’t sound all that responsible to me.

When ambition outweighs talent

It’s also worth mentioning that cancellations for the Model 3 are at 2%. What if that number increases? What happens if production is delayed? It’s happened before, with both the Model S and Model X. What happens when there’s a competitor on the market? What about an all-electric car at the same price point but available and in production immediately?

Funny I should mention that…

General Motors [NYSE:GM] is bringing the Chevrolet Bolt to market this year. It’s a US$30,000 all electric, connected car with advanced driver assistance technology. Importantly, it’s a direct competitor to the Model 3, as it has a range in excess of 200 miles (321km). It’s the ‘Model S’ before the Model S.

GM beat Tesla at their own game. But clearly GM doesn’t get fanboy status like Tesla does.

The other thing is GM is production ready. Tesla’s Model 3 hasn’t even finished design yet. And with Tesla’s notorious record of delayed production, do you really think they’ll manage to make 500,000 cars within the next year and a half?

Here’s the wrap up on all this…

I think Tesla has a problem. I don’t think they’re particularly good at producing and delivering cars. Make no mistake, the cars they do make are exceptional. But they’re not good at doing it on a large scale.

I also think the way they manage their cash and debt is dubious.

I don’t think the demand for the Model X will hit the highs of the Model S. And I doubt the Model 3 will see the light of day before 2018. Meanwhile GM and others will gobble up customers. Cars like the Bolt will take market share away from Tesla. Being first to market tends to do that.

Tesla could (and should) aim to be a niche car maker like Porsche Automobil SE [ETR:PAH3] or Ferrari NV [BIT:RACE]. This would be a market they could do well in. And I can see justification of a market cap around that of Porsche or Ferrari.

Instead Tesla is worth around four times Ferrari. It’s too inflated on hype and endless promises. However, if Tesla’s stock price were US$55, then I’d call that fair value.

But it seems Tesla’s ambition outweighs their talent. Trying to become a genuine mass market car maker is a stretch too far. And I think it’s all about to come crashing down around them.

I think that by mid-2018, amongst delays and missed targets, Tesla’s stock will be closer to US$55 than US$255. And if you’ve got the guts, Tesla might just be the perfect stock to short.


Sam Volkering,
Editor, Money Morning

Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

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