Short-sellers wrong about Tesla

This Unz Review article went viral a few months ago Thorfinnsson’s Take on Tesla

A typical akarlin post gets 12-30 comments, but this one got over 200, indicating considerable interest in Tesla. Tesla is one of the most closely scrutinized companies in existence. It’s not so much about Tesla as a company, but also its founder Elon Musk, who also generates a lot controversy.

Note: the article is not akarlin’s own opinion of Tesla but rather that of a commenter on his blog, ‘Thorfinnsson’, who believes Tesla stock is going to zero next year. Which I think is laughable and absurd. He says he bought put options to bet against Tesla, but I implore him to put up proof. To say Tesla is going to zero is a pretty audacious claim. Talk is cheap. Put options have a high rate of failure because one must get the timing and the price right [the relationship between the price of an option, its strike, and duration is governed by a special formula]. [1] There’s no shortage of people who think they are smarter than Wall St., and the vast majority of them lose money–look at all the people who bet (and lost) against the post 2009 bull market and economic expansion, officially the longest ever. They think that some article on Zero Hedge makes them privy to ‘special knowledge’ that Wall St. is oblivious to, when all they really have is wishful thinking and erroneous information. If you base your investment decisions on Zero Hedge and the U.S. Debt Clock, you deserve to lose money and will.

He lists reasons for why Tesla stock is going to zero, most notably that Tesla “is burning through one billion per quarter and is likely to run out of cash this year.”

Stock prices are a real-time barometer of the future expectations of an underlying company or index, based on the totality of public (and maybe even private) information. Market participants effectively cast votes (buy or sell), and the end result is the present stock price, based on thousands of millions of these votes. The idea is that the collective wisdom is smarter than any one participant, but in some cases it is possible for an individual to be smarter than the crowd, but this is uncommon and typically requires access to materially significant information that no one else has (which is why insider trading is so profitable).

As of 8/24/2018, Tesla stock is at $320/share, which is close to its all-time high and indicative of confidence in the future of Tesla in spite of Tesla losing money. If market participants were actually concerned about insolvency, the share price would be $3, not $300. So is ‘Thorfinnsson’ smarter than the wisdom of the crowds? I don’t think so. All he has is accesses to information that is available to the public and therefore factored into the present stock price. Wall St. is well aware that Tesla is losing money, but there is more than meets the eye here, which explains why the stock is not at $3.

As discussed in Why it does not matter that Tesla is losing money, Tesla is losing money on an EPS (earning per share) basis, but EPS does not make a distinction between one-time capital expenditures and operating income. Remove those expenses and suddenly Tesla is earning $1 billion a year in profits. Imagine two businesses: one that invests $1m into a factory or store and makes $300k a year. It loses $700k, which look bad, but after the factory is paid off, it’s making $300k profit every year. Consider a second business that earns $300k a year but spends $1 million every year on advertising in the hope of retaining customers. The second business is in a much less fortune situation because advertising is a recurring expensive whereas building a factory or a store is not. Tesla spends very little on advertising and gets free press from the constant media attention its cars attract, and also due to Elon Musk’s own celebrity status, and also Space-X and other projects that generate a ton of free PR. Ford and GM have to advertise constantly, but Tesla does not. But to those who want to bet against Tesla, by all means go ahead. In a few months or a year, you’ll learn the hard way what everyone else who has tried and failed learned: it does not work that way.

It’s like opening a McDonald’s franchise. The cost of buying the location shows up as a large but one-time loss; however, the restaurant operations are profitable.

Regarding Tesla running out of money, Tesla has demonstrated an unrivaled ability to raise money in the capital markets. Tesla can easily raise another $3-5 billion by selling bonds or stock, which should be enough for a few years as Tesla continues to ramp-up production, until finally stopping the expansion, after which Tesla will be profitable.

Regarding not meeting production goals, this also is not a big deal unless people on the wait list cancel their orders, which has not happened. Loyal Tesla fans are more than willing to wait up to a year. That’s why Tesla is investing so much money in manufacturing, yet the people who criticize Tesla for both spending too much money and not meeting production goals fail to understand the contradiction here.

[1] The Unz article was published 3 months ago, so unless he sold the puts or never bought them, he’s probably down a lot by now given that Tesla stock has not fallen.