A high-end Tesla Model S can rocket from zero to 60 mph in 2.27 seconds.
But can the electric car maker itself accelerate from producing 80,000 autos a year to 500,000 in 2018? A million in 2020? Can it make money in the process?
Short sellers are betting big on no.
It’s a dangerous bet.
Here’s how it works: Short sellers borrow shares in companies they think are overvalued. They sell those shares at current market price and usually pay interest to the lender. At some point, the shares must be returned.
If the stock gets hammered, short sellers hand them back at a profit. If the stock soars, they get hosed. The higher it goes, the more they suffer.
Short sellers often get a bad rap. But the best ones dive deep on a company’s finances, management and market prospects. They often draw attention to concerns that would never be publicized by corporate marketing.
That’s why chief executives tend to despise short sellers — and Musk is no exception. On April 3, he tweeted with glee about “Stormy weather in Shortville…” as Tesla stock continued to rise. It topped Ford in market value and briefly surpassed General Motors. The stock soared 47% over the past four months; it closed at $305.60 on Friday.
“We continue to be surprised at how determined some people are to dig their own graves,” Tesla said in response to the short sellers. “Our focus is on our mission to accelerate the advent of sustainable energy and creating products people love.”
But on the whole, the shorts — who account for nearly 20% of Tesla’s outstanding shares — have not been deterred.
To find out why, The Times talked to four of them:
- Mark Spiegel of Stanphyl Capital Management, the most outspoken of the Tesla shorts.
- David Rocker, formerly of Rocker Partners, now retired as an investment manager but short on Tesla as an individual. (His only other short, he said, is Valeant Pharmaceuticals International, the controversial drug-price hiker, which paid off big.)
- Mark Yusko, founder and chief investment officer at Morgan Creek Capital Management. The firm takes a mostly long diversified approach to investing but does occasionally short stocks. Yusko said the company holds a small short position in Tesla and may increase it.
- Anton Wahlman, a former stock analyst, now an individual investor and writer who follows the auto industry. He’s been both long and short on Tesla and currently holds no position, but said he remains dubious about the company’s prospects.
Tesla has proved it can build appealing luxury electric cars, but the company still loses money on operations year after year. The shorts believe that making money will become even more problematic with the introduction of the mass-market Model 3 later this year. The short view on Tesla boils down to seven main themes.
1. Cash flow
“If you can’t make money selling a $100,000 car to rich people, how are you going to make money selling a $45,000 car to normal people?” Rocker said. To make the short case against Tesla stock, “you don’t really have to go any farther than this.”
Tesla pegs the Model 3 base price at $35,000. Add some options, Musk has said, and the typical selling price comes closer to $43,000.
How much is profit? Spiegel thinks none: “I’m saying they’re going to lose money on every Model 3 they build and sell.”
Using data from Tesla’s 2016 fourth-quarter earnings report, Spiegel estimated the combined average selling price for non-leased Model S and X at about $104,000. He calculated a combined average cost per car of about $82,000.
The Model 3, built in the same Fremont plant with the luxury models, will be smaller, with a less-powerful battery, stripped-down base-model technology and less-than-luxury interior appointments. The entire instrument panel will be replaced by a single touchscreen. The company plans to produce hundreds of thousands a year. It’s counting on economies of scale and better pricing with suppliers to keep costs down.
Wahlman is dubious: “You can cut the price of a car in half, but you can’t cut the cost in half.”
If Tesla can’t consistently produce positive cash flow with the Model 3 and other products, it must keep turning to the financial markets to stay alive.
Right now, Tesla holds about half the all-electric car market in the United States — a tiny faction with only about 159,000 cars sold in 2016. It’s a growing market that even the company’s fiercest critics will credit Tesla for creating.
But nearly all major global auto manufacturers have announced ambitious plans to sell pure electric and plug-in hybrid vehicles over the next few years.
“Tesla faces a formidable set of competitors, and they’re coming in with guns blazing,” Wahlman said.
“Once the market is flooded with electric vehicles from manufacturers who can cross-subsidize them with profits from their conventional cars, somewhere around 2020 or 2021, Tesla will be driven into bankruptcy,” Spiegel insisted.
Yusko isn’t quite that downbeat. “I’m not in the ‘Tesla’s worth zero’ camp,” he said. “But I definitely think that anyone buying at [recent] prices could cause a meaningful impairment to their financial health over the next few years.”
Pure electrics, already available or coming soon
- Chevy Bolt EV crossover — 2016
- Nissan Leaf second generation — 2017
- Lucid Air luxury sedan — 2018
- Hyundai Ioniq Electric — 2018
- Audi e-tron sport utility — 2018
- Jaguar I-Pace crossover — 2018
- Aston-Martin RapidE luxury sedan — 2018
- Porsche Mission E sports car — 2019
- BMW X3 crossover — 2019
- Volkswagen I.D. crossover — 2020
- Ford crossover — 2020
- Plus, dozens of Chinese models for possible export
3. Vanishing tax credits
Electric car buyers can claim a $7,500 credit on federal taxes. The subsidies are intended to get more electric cars on the road. But there’s a limit for each manufacturer: 200,000 vehicles. After that, incentives decline every six months for a year, before they disappear.
If the Trump administration and Republican Congress leave the credits in place, and Tesla gets anywhere near its 500,000 vehicle production goal by the end of 2018, the incentives should start winding down early next year. Competitors who aren’t anywhere near 200,000 EVs — almost all of them — will hold a significant price advantage. That favors the shorts.
More than 370,000 customers put down refundable $1,000 deposits for a Model 3, the company said last year. If federal incentives vanish while they wait, will they bolt?
Rocker figures $1,000 amounts to a near-costless option on a $7,500 tax credit. But since it’s refundable, “it commits them to nothing.” Many may not be willing to pony up an extra $7,500 from their own pocket for a Model 3.
4. Lack of patents
“Traditionally dominant companies in an industry have patent protection,” Rocker said. “Musk is a messianic figure. He’s a technological genius, but he has no patent protection.”
That’s a bit of an overstatement. But Musk has made many of Tesla’s patents available to all to help kick-start a new-energy economy.
Of course, Tesla could possess a deep store of trade secrets which, unlike patents, the company is not required to publicize.
Even shorts give the company credit for pioneering over-the-air software updates for its vehicles, and for pushing the envelope on self-driving technology.
But Tesla faces competitors in autonomous cars with trade secrets of their own.
And Tesla’s latest iteration of Autopilot, its vaunted self-drive technology, has drawn a class-action lawsuit from consumers who claim it doesn’t work as advertised.
Musk runs Tesla. He also runs Hawthorne-based SpaceX, a space flight company with an ultimate mission to build a new civilization on Mars. He was chairman of SolarCity, the solar panel installer that Tesla bought last fall. He’s involved in an artificial intelligence research group and announced plans to dig transportation tunnels with a new endeavor he calls the Boring Company. Recently, he invested in a venture that aims to plant electronics in the human brain.
“He’s all over the map, from tunneling to flights to Mars to solar roof tiles,” Rocker said. Whatever Musk’s core motivations, he said, it all has the effect of artificially boosting Tesla’s market value: “It’s ‘Let’s get the acolytes excited. Implant in the brain! Let’s buy Tesla stock!’ ”
More distractions: Musk’s plans to build semi-trucks and buses. Bulls see those projects serving up billions in revenue; shorts see an unwieldy and overloaded plate.
Meanwhile, the shorts all noted that high-placed executives continue to exit the company, including Chief Financial Officer Jason Wheeler earlier this year, putting further strain on Musk’s attentions.
Execution risk — the ability to deliver on its strategies and stated goals — is where companies hold the most control. Musk is infamous for missing deadlines. As Tesla moves into large-scale manufacturing with the Model 3, timing will be more important than in the past. Supplier relationships are more crucial, but hard to manage at scale. Mass-market buyers will be less forgiving than luxury buyers on late deliveries or quality problems.
“Investing is all about possibility and probability,” Yusko said. “Is it possible that Tesla will produce 500,000 cars in the next two or three years? Yes. Is it probable? No.”
7. Investor fatigue
Musk will need billions more to scale up vehicle production, but the company is $7 billion in debt, with negative cash flow. Without a steady cash influx, Musk will need to return to the capital markets. So far, he has proved a genius at raising money.
That’s put the hurt on short sellers. But Yusko, whose firm has made small short bets on Tesla, is looking for the moment when the true believers begin to lose faith.
“We’re awfully close to the point where people wake up and realize these guys are seriously diluting our equity” with new stock and convertible bond issues, Yusko said. Tesla went back to the markets as recently as March and raised another $1.8 billion.
However, the shorts admit they felt the same several years ago. Musk doesn’t hurt for passionate supporters, from rabid fanboys to respected investment firms.
Postscript: Bulls on parade
Tesla’s been offering its bright vision of a new energy future for years. Even critics find it compelling. “I do think Elon Musk is a visionary,” Yusko said. “He has an incredible mind. He is a fantastic storyteller.”
Rocker added: “I don’t have anything against the guy personally. He wants everybody to get rid of fossil fuels. That may be a laudable thing as a human being, but it is not the root of a financially successful company.”
The stock market thus far disagrees, as investors flock to Tesla as the next great growth company.
Many Tesla analysts, high on the company, have said current prices have gotten ahead of financial reality. But other analysts see more glory ahead.
Alexander E. Potter spent seven months driving a Tesla. He was impressed. Early in April, he upgraded his recommendation on Tesla stock from “neutral” to “overweight,” and lifted his price target from $223 to $368.
He explained himself in a note to investors:
“Tesla’s products have a captivating impact on consumers and shareholders alike; this advantage will be difficult to replicate. In the minds of its customers, employees, and shareholders, Tesla isn’t just another company. More so than any stock we’ve covered, Tesla engenders optimism, freedom, defiance, and a host of other emotions that, in our view, other companies cannot replicate. As they scramble to catch up, we think Tesla’s competitors only make themselves appear more desperate. With this in mind, even if the Model 3 production launch goes badly, we think customers (and more importantly shareholders) will withhold judgment.”