Northwest Arkansas Democrat-Gazette
Some traders bank on Tesla tumble
Mass-market Model 3 to bleed red ink, short sellers say
SAN FRANCISCO — 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 vehicles 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.
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 buy them back and return them at a profit. If the stock soars, they gets 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 Tesla Motors Inc. Chief Executive Elon 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 Motor Co. in market value and briefly surpassed General Motors Co. Tesla shares soared more than 47 percent over the past four months; they closed at $314.07 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.
But on the whole, the shorts — who account for nearly 20 percent of Tesla’s outstanding shares — have not been deterred.
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 massmarket Model 3 this year.
“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?” said retired investment banker David Rocker, who holds short postions in Tesla. 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? Stanphyl Capital Management’s Mark 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, Calif., plant as the luxury models, will be smaller, with a less-powerful battery, stripped-down 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.
Anton Wahlman, a former stock analyst, now an individual investor and writer who follows the auto industry, 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 crosssubsidize them with profits from their conventional cars, somewhere around 2020 or 2021, Tesla will be driven into bankruptcy,” Spiegel said.
Mark Yusko, founder and chief investment officer at Morgan Creek Capital Management, 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.”
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 electric vehicles — almost all of them — will hold a significant price advantage.
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?