There is one group of investors who will be closely watching Tesla’s results due out tomorrow: the shorts. The reason is that with the stock trading near record highs following a dramatic rebound from the February lows when it plunged to $150, only to rebound back to $250, short sellers have stubbornly refused to step away, and as the chart below shows, short interest remains just shy of record high.
As Reuters notes Tesla’s nosebleed valuation of 125x forward earnings, has kept it a shorters’ favorite. In fact, the company is among the world’s 10 most-shorted companies by market value, even after the torrid 85% rally earlier this year scalded some of those short sellers. In the past month, short bets against Tesla have fallen modestly, but are still above $6 billion, according to financial analytics firm S3 Partners.
“This is not just day traders coming in and out of the market. This is fundamental guys who have put it in their portfolio and are saying, ‘We don’t believe this valuation is correct,'” said Ihor Dusaniwsky, S3’s head of research.
That may be the case, but Tesla had roughly the same number of shorts when the stock price was below $50: anyone who has kept their short position since then has been crushed.
Vilas Capital Management Chief Executive John Thompson, one of those short sellers, cited by Reuters said he believes investors underestimate the hurdles Tesla faces trying to rapidly increase production, including the cost to build future high-end robotic assembly lines.
“They’re going to have to spend an enormous amount of money on capital expenditures to achieve their long-term goals and they don’t have the money because they don’t have the earnings,” Thompson said. “So they’re going to have to sell stock to finance it.”
So what is the fundamental case math: with a market capitalization of $31 billion, Tesla is valued at about $620,000 for every car it delivered last year, and about $63,000 for every car it hopes to produce in four years, in 2020. By comparison, General Motors, with its 5x PE and $48 billion market value is equivalent to about $4,800 for every vehicle it sold last year: a 130x growth premium.
Some more math: if Tesla shares were to grow 10% a year for the next decade it would have to reach annual sales of 1.5 million cars at triple GM’s typical $1,000-per-car profit to justify a more moderate price-earnings ratio of 20. Last year GM sold 10 million cars and Ford sold 6.6 million. Tesla delivered 50,000.
Certainly Tesla could find alternative revenue streams and make money by selling batteries – as it has tried to do with its Powerwall to mixed success – or autonomous vehicles, but its valuation is questionable nonetheless and leaves no allowance for operational setbacks, according to Georgetown University business professor James Angel. “This stock is definitely priced to perfection. If he pulls everything off, it’s probably worth its current value, but there’s a huge amount of execution risk here.”
Recent problems like malfunctioning doors and glitchy sensors have cast light on the difficulty of quickly expanding production as Tesla prepares to launch its Model 3 sedan next year.
That’s not all.
Among the problems: low oil prices hindering uptake of electronic vehicles, a gimmicky pre-sale of the Model 3, increasingly erratic non-GAAP adjustments…
… the discontinuation of the company’s self-reported Free Cash Flow line item as seen before…
… and after.
And an unsustainable cash burn rate: the company has burned through $3.2 billion in the past 2 years, while its cash on hand is now only $1.2 billion.
This means that an equity offering by Elon Musk is likely imminent, and may be announced as soon as tomorrow’s earnings “kitchen sink” earnings announcement.
However, whether or not the stock reaction to earnings will delight the shorts remains to be seen: just like AAPL during the Steve Jobs phase, the company’s fanatical fan base has refused to give up on the idea of Elon Musk’s golden touch. However, there is only so much even Musk can do to stimulate demand at a time when luxury discretionary purchases are suddenly slowing down around the globe (see AAPL), while the market is sufficiently saturated and those who would have bought the expensive, if iconic, electric car already have.
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