Tesla: Bulls Vs. Bears

My article on Tesla was published on Seeking Alpha two weeks ago and since I was away on  vacation I didn’t have time to publish it on the blog. This article can be seen as a companion to the podcast I did, The Intelligent Investing Podcast with Eric Schleien.

We talked about the most hated or loved stock in America: Tesla. Elon Musk and Tesla are a very polarizing topic. The most hardcore short-sellers believe that Tesla is a fraud, Elon Musk is a conman, and the stock is worth less than zero. Fanboys believe in Elon Musk’s mission of transitioning the world to sustainable energy and will have become one of the most valuable and successful companies in the world. Both camps are deeply entrenched in their position and it’s very interesting to see them go at it. I also published a companion to the podcast on Seeking Alpha; Tesla: Bulls vs. Bears.

The podcast was recorded three weeks ago. When Tesla is the subject matter, a lot can happen in two weeks. Tesla, the drama filled company that gets TMZ style coverage, is one of the main reasons why I stay away from the stock. Even though the shorts have a very compelling investment thesis, the market seems to think otherwise. Tesla currently trades at $375 a share. When the article and podcast was published Tesla traded at $300. Seemingly out of the blue, Elon Musk proclaimed that he might pull his money-losing Tesla off the market for $420 a share! He also claimed that he has funding secured.  This story is not over.

Here’s the SA Article. The full article is available on Seeking Alpha.


Tesla: Bulls Vs. Bears

By Brian Langis

Summary

  • Elon Musk and Tesla are a very polarizing topic. Tesla may be the most hated or loved stock in America.
  • Tesla comes with a lot of noise and buzz. Facts, figures, and claims are exaggerated, spun, and manipulated to one’s interest or to simply distract from the real issue.
  • I have front row seats to a good heavyweight fight between Tesla bulls and bears.
  • It’s not the first time Tesla faces an existential crisis.

I had the pleasure to be back on The Intelligent Investing Podcast with Eric Schleien to have an in-depth conversation on Tesla (TSLA). If you are even reading this, you are fully aware that Tesla has turned into a full blown soap opera. The podcast and this following article try to make sense of the Tesla drama.

Since Tesla is a very polarizing topic, let’s start off with the disclosures regarding Tesla:

I’m not a shareholder and never was. I’m not a short-seller and never was. I don’t have an agenda. I don’t have a horse between the short-sellers and the bulls. I’m not a “hater” or a “fanboy”. I don’t have a secret source inside Tesla’s factories. I didn’t pay anybody for information. I don’t own a Tesla. I find the debate between the Tesla bulls and bears very interesting.

Bloomberg Headline ( Link)

I long hesitated writing an article on Tesla. I wrote short one back in January 2014. Tesla is one of the most popular (or unpopular) stocks on Seeking Alpha and the media. There are a couple of pieces published every day and it wasn’t clear at first how I could add value to the debate. It’s has all the ingredients for a juicy story. The combination of a very colorful CEO on a mission to save the world, a flashy company that is disrupting the auto and energy industry, and with billions of dollars at play makes this stock very emotionally divisive. Musk and Tesla comes with a lot of noise and buzz. Facts, figures, and claims are exaggerated, spun, and manipulated to one’s interest or to simply distract from the real issue. And I think this is where the opportunity is. With so much being said, it’s hard to see the forest for the trees. We need to take a step back and get a little perspective. I will write about the good and the bad. While the goal of this article is to provide clarity, I’m aware that this article won’t change people’s mind since folks with money on the line are deeply entrenched in their position. I haven’t seen a bull turned bear on Tesla or vice versa.

I have front row seats to a good heavyweight fight between Tesla bulls and bears. These two opponents have very opposite points of view. In one corner, we have the bulls, aka the fanboys. The fanboys are “believers”. They believe in Musk and that Tesla will achieved its mission of transitioning the world to sustainable energy and will have become one of the most valuable and successful companies in the world. The legacy car companies like GM and Toyota are dinosaurs that won’t be able to compete with Tesla because of its EV head start and superior technology. Musk has also talked about turning humans into an interplanetary species. He makes you dream. In the other corner, we have the bears, aka the “haters”. The extreme version of the bear thesis is that Musk is a straight up fraud and Tesla is going to bankrupt. The milder version of the bear thesis is that Tesla is overvalued and a correction is due.

I try hard to look at Tesla from a rational and objective point of view and this is a difficult task. I also suffer from my own biases. From the outset I’m a fan of Elon Musk but skeptical about investing with him. I’m a fan for what Elon has accomplished and tries to accomplish. I’m a skeptic because I’m not into fairy tale stories and I understand basic high school math. But whether you like Elon or not, his journey from his youth to present day is very interesting and inspiring. Ashlee Vance’s biography of Elon Musk is an excellent book that covers his journey. Of course Musk is a flawed individual. He has personal foibles and challenges as everyone else.

Let’s try to cut to through the clutter and noise.

Tesla’s Background Story

If you are new to the shorting Tesla bandwagon, it’s probably of interest to know that Tesla has faced a few existential crisis in the past. The point is that betting against Elon Musk hasn’t paid off (yet). Experienced short-sellers are familiar with the saying: “The market can stay irrational longer than you can stay solvent”.

Tesla is Elon Musk’s baby. Tesla was founded in 2003 and even though it has been 15 years, it has the look of a start-up; it’s not profitable, they are burning cash at a rapid pace, and they are still working on their products. It’s not the first time that Tesla is suffering from extreme pressure. Actually this company has been under pressure its entire existence. Hard work and a couple of lucky breaks helped push Tesla forward.

Back in 2003 the brain trust at Tesla figured out that lithium ion batteries got really good and were going to get much better. Traditional car companies haven’t caught on to the idea of lithium ion battery powered cars but a couple of tinkerers in California were already playing with the idea. They reached out to Elon Musk because back then he was talking about sending mice into space and they got the impression he thought differently and would be open to the idea of funding an electric car. Musk agreed and provided the seed capital. This also put Musk in a position of strength for control of Tesla.

The roadster was first announced publicly in 2006. Governor Arnold Schwarzenegger was there with other celebrities. There was a real buzz and the company got really good publicly. Tesla succeeded at making electric cars sexy and the fact that you couldn’t get one made it even more desirable. Rich people were trying to bounce either off the waiting list. Wealthy eco-crusaders back in the days had to settle for a Toyota Prius. People who used to go after Lexus, BMW, and Cadillac saw electric and hybrid as a different kind of status symbol. At the beginning you weren’t legally allowed to buy a Tesla car but if you joined their “car club” for $100,000 one day you would get a“free” car. The strategy at the time was to focus on a high-priced, low volume product and moving down to more affordable products over time. The Roadster was a hit with the public but Tesla couldn’t figure out how to make money with it. In 2007 Tesla was suffering from operational problems and it cost $200,000 per Roadster to produce when they have been led to believe that manufacturing the car would cost $65,000. It’s around that time that Musk takes over as CEO. In 2008 “Tesla had less than $500,000 in the bank”, according to a later Wired profile. In 2009 Tesla gets a $465m loan from the Department of Energy. In 2010 Tesla bough the GM/Toyota factory in Fremont for only $42m (once worth a $1b). It was so cheap because GM was climbing out of bankruptcy. In June 2010 Tesla has its IPO and it raised $226m. The stock was up 41% in one day. Investors looked past Tesla’s $55m loss in 2009 and the more of $300m they spent in 7 years. It was also the first car IPO since Ford in 1956. Between 2008 and 2012 Tesla sold 2,500 Roadsters.

In 2012 the Model S (Sedan) is announced. That’s when it stunned its peers in the automotive industry. The Model S was named Motor Trend car of the year and generated tons of buzz. Tesla posted a small profit in 2013, $11m on $562m in revenues. By the way Tesla played a trick on the media when the Model S was first showed to the public because it barely held together. It looked great from a distance but if somebody touched it you could slide the hood right off. Some parts were held together with magnets…

In 2013 Tesla falls into crisis mode again. It couldn’t convert the Model S reservations into purchases quickly. A lot of people were hanging out on the sidelines to make sure the company would remain viable. But if nobody buys, the stocks falls, and if the value of the company falls prospective owners would become more cautious and short-seller would win. Elon asked employees of every stripe to start making phone calls to turn reservation into sales.

Around the same time, Musk reaches out to his pal Larry Page at Google. He voiced his concerns about Tesla’s ability to survive the next few weeks. He tells Page that Tesla is slow to convert reservations and customers defer their orders because they heard about new features coming up. Tesla shuts down its factory. Tesla said it was for maintenance but the real reason was to save cash. Elon struck a handshake deal with Page for Google to acquire Tesla. Google would need to pay $6b for Tesla. Musk asked to stay on 8 years, $5b in capital for factory expansion, plus a promised to mass market cars. Then a miracle happen, sales started to come in and the Tesla was saved. Stock went up from $30 to $130. Short-sellers took massive losses and Tesla paid off the $465m loan. The deal with Google was no longer necessary.

Musk is now working on the Model 3, his dream of mass market electric car. Elon has bet the company on it. The Model 3 was supposed to be called the Model E but Ford has the trademark. Even though Ford made the Model T hundred years ago, it’s not known for making “models”. Tesla has the S, X, and the Y was announced but trademark law is a dry profession it turns out (S-E-X-Y).

Elon Musk vs. The World

More…

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