Why I'm Thinking About Shorting Tesla

I'm a big fan of Tesla Motors (NASDAQ: TSLA  ) . While massive global automakers like General Motors (NYSE: GM  ) and Nissan have been forced to cut prices on their electric vehicles to move them off dealer lots, Tesla can't produce enough of its Model S luxury sedan to meet demand. Back in February, I wrote that Tesla was "primed for profit" in 2013, and I recommended the stock as an attractive growth investment.

The Tesla Model S (courtesy of Tesla)

However, when I wrote that article, you could buy Tesla stock for less than $40. As of Wednesday's close, Tesla's stock price had soared to nearly $140, after peaking at $158.88 last week.

TSLA Chart

Tesla Six-Month Price Chart, data by YCharts

With Tesla stock having nearly quadrupled in the last four months, there's no margin of safety left for potential investors. As a result, I cannot recommend buying the stock at this point. In fact, if the stock goes any higher, I will seriously consider shorting Tesla. The company's valuation has started to move beyond a level consistent with its likely prospects.

A strong growth company
While I'm pessimistic about Tesla stock's prospects, the company itself is performing very well. Last quarter, Tesla produced a surprise non-GAAP profit of $26 million and sold a record 5,150 Model S sedans in North America. Automotive gross margin (excluding ZEV regulatory credits) has improved by 17 percentage points over the last two quarters. Tesla is well on the way to its goal of achieving a 25% automotive gross margin by year's end. Increases in volume, logistics improvements, and part redesigns all contributed to the improvement.

Sales are expected to continue growing rapidly. Tesla is just starting to deliver cars in Europe, and it will make a big push into Asia later this year and in 2014. Management believes that this will allow Tesla to ramp up Model S production to an annualized rate of at least 40,000 by the end of 2014. At that point, Tesla is expected to begin building its second mass-production vehicle, the Model X crossover, leading to further sales growth.

What's Tesla really worth?
As impressive as this sales growth is, analysts expect Tesla to earn revenue of just under $3 billion next year, whereas its market cap is more than $16 billion and peaked around $19 billion last week. At those prices, investors should be asking how much Tesla can realistically be expected to earn in the future.

Model S revenue per vehicle has been a little over $100,000 so far, primarily due to the popularity of higher-end packages, even though the starting price is less than $70,000. However, Tesla's average selling price is likely to decline significantly over time.

First, as component costs decline, Tesla will probably have to pass some of the savings along to customers. These price cuts would offset the expiration of regulatory credits such as the $7,500 federal tax credit for Model S buyers. (This credit will phase out later this decade when Tesla hits 200,000 cumulative vehicles sold in the U.S.) 

Second, as Tesla saturates the market of wealthy enthusiasts, the mix of Model S (and Model X) sedans will shift toward the lower-priced variants. Third, Tesla plans to introduce a $35,000 vehicle for the mass market later this decade. Due to the lower price point, this model would almost certainly be Tesla's top seller by a wide margin. Combined, these factors could push Tesla's average selling price from over $100,000 today to $50,000 or less by the end of the decade.

There are two key questions for Tesla investors. First, how large is the addressable market for electric vehicles at a $35,000 price point? Second, what level of gross margin could Tesla achieve for a car at this price? Both answers could be somewhat unsettling for Tesla investors.

Tesla expects its $35,000 affordable car to have a 200-mile range. However, earlier this year, the company killed off the 40 kWh version of its Model S sedan -- which offered a 160-mile range -- due to poor demand. The utility of a fully electric car decreases dramatically as the range gets lower. So even with a $35,000 price point, Tesla might be able to sell only 100,000-200,000 units of the next-generation car annually.

Furthermore, while I believe that Tesla can meet or exceed its gross margin goal of 25% when it is just selling the luxury Model S sedan, I do not think it will be able to earn such generous margins on a $35,000 car. GM's Chevy Volt now starts at $35,000, and GM was apparently losing money on every Volt it sold even at a higher ($39,000) price point.

The Chevy Volt (courtesy of General Motors)

While electric vehicle production costs are coming down, Tesla would dilute its brand severely by making a car as spartan as the Volt. As a result, I suspect that Tesla's hypothetical $35,000 car would have a gross margin of just 10%-15%.

Foolish bottom line
If Tesla managed to sell 100,000 luxury cars (Model S and Model X combined) and 150,000 affordable cars in 2018, that would be a great win for the company. Production would have grown 12-fold in just five years. At an ASP of $50,000, revenue would be over $12 billion; up sixfold from expected 2013 revenue of just over $2 billion.

Assuming that overall company gross margin declined to 20%, but operating expenses fell to 10% of revenue (down from around 20% today), Tesla would post a 10% operating margin. After accounting for interest and taxes, this would imply EPS of $5-$6, depending on the extent of shareholder dilution between now and then.

Is Tesla really worth 25-30 times 2018 earnings? I doubt it. By that time, there are likely to be viable competitors in the EV market, and the green car enthusiast market will be more or less saturated. In other words, Tesla's growth rate is likely to be much lower at that point. Of course, it is possible that Tesla will manage to produce more than 250,000 vehicles in 2018, but that also seems fairly unlikely; I am already projecting a lofty 65% compound annual growth rate for vehicle production.

In other words, if Tesla is not quite priced for perfection today, it is fairly close. If the company falls short of investors' expectations in any way -- i.e. lower than expected profit margins, more production bottlenecks, additional vehicle development delays -- the stock could fall very far. So what do you think? Should I short Tesla? Let me know in the comment box below.

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Read/Post Comments (46) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On August 15, 2013, at 11:12 AM, caarecengi wrote:

    Yawn - another article by some naysayer who just doesn't get it. TSLA is a technology company, a green energy company, and an auto company all rolled into one. The vision of people like you and the clowns on Seeking Alpha is so short sighted as to be prejudicial.

    Go ahead and short sell it

    I bet you a lunch that you'll lose big time. I secretly hope you get your ass handed to you.

    How about Chipolte? Do you really think it's a burrito economy? Go short sell that bloated stock instead. Plenty of ways to make money in this market without getting steamrolled by the next Steve Jobs...

  • Report this Comment On August 15, 2013, at 11:17 AM, rhealth wrote:

    Please, by all means go ahead. Short interest is a large part of what has enabled my incredible gains in this stock. Where would I be without you?

  • Report this Comment On August 15, 2013, at 11:21 AM, AlaaSadek wrote:

    We here in Egypt will drive Tesla UP

  • Report this Comment On August 15, 2013, at 11:33 AM, QQ007 wrote:

    Because you have too much money and you want to donate it to the masses.

  • Report this Comment On August 15, 2013, at 11:36 AM, MartyTheCanuck wrote:

    I don't short stock so take my comment with a grain of salt.

    TSLA may be priced for perfection, hard to argue with your arithmetic. It quadrupled in a few months, and looks overvalued now.

    But it is a cult stock. And cult stocks are hard to predict. It may remain overvalued for a long, long time, if it delivers like you expect. Unless something bad and major happens, it may never come crashing down, just slowly grows into its price.

    So I'm long TSLA ( avg price 45$ ), and a bit torn at this price. But I wouldn't consider shorting it.

  • Report this Comment On August 15, 2013, at 11:43 AM, ken11111 wrote:

    I would not consider shorting Tesla. The stock has taken on a life of its own. Even the nay sayers cannot make it go down for an appreciable amount of time.....go back to about three weeks ago when it lost 8 percent because of an analyst down grade...it is now at least 20 percent more than that....

  • Report this Comment On August 15, 2013, at 11:44 AM, Grumpycat wrote:

    Yes, and you're hoping to buy electric tanks for your army, right?

  • Report this Comment On August 15, 2013, at 11:46 AM, ken11111 wrote:

    And I just saw it has been added to the MSCI index!!! Go Tesla!

  • Report this Comment On August 15, 2013, at 11:47 AM, ken11111 wrote:

    awwww....don't be a grumpy cat grumpycat....smile

  • Report this Comment On August 15, 2013, at 11:52 AM, AlaaSadek wrote:

    @Grumpycat what an id! Back in 1973 we did what we did without American help. Got that pussycat?

  • Report this Comment On August 15, 2013, at 12:00 PM, Oseo wrote:

    Who buys what stock is great to watch, especially when you feel lost. Fortunately, with Tesla, you will never be lost. They are unique in every way. In a river of change and innovation, the are far at the front. They have already brought us the best product overall, the best electric product, the best infrastructure, the best indication for further models, the best market response, the best revenue growth by any stretch of the imagination... the list goes on... What's left? For you to have confidence in a absolutely confident company... Even the harsher critics of Tesla have come around. Their growth is exploding: Selling cars, electricity, car technology to other companies looking to make a product remotely similar to theirs, etc... Tesla is the present and the future. They are a sure thing. You can feel good, in many ways, about buying Tesla. Your children will thank you for the clean air...

    supply constraints increase quickly: everyone wants to sell where there is overwhelming demand. There is no more powerful motivator for people to get out of bed in the morning than to know they will sell what they make. Tesla’s growth is both theirs and all their suppliers. Do you really think their suppliers don’t want to expand along with Tesla’s demand? Tesla is literally in a pressure cooker for growth. They are both pushing and getting pulled forward exponentially.

  • Report this Comment On August 15, 2013, at 12:04 PM, AgeOfRobots wrote:

    These "Tesla is way overvalued - It is going to crash - I am going to short" are becoming super redundant and are super-unoriginal.

    Between the Motley Fool and Seeking Alpha these Tesla articles are almost becoming formulaic as a surefire method to increase article view count and get the writer noticed.

    Every article that comes out has subsequently less and less informative value and instead adds to the noise surrounding the stock. Where's the signal? I guess its buried some where in the noise...

  • Report this Comment On August 15, 2013, at 12:20 PM, rhealth wrote:

    Here's another thought, how many of you writing these Tesla short articles actually run a business? I'm guessing not many, if you did you would have an appreciation for the rare excellence in the way Tesla is run and executed.

  • Report this Comment On August 15, 2013, at 12:34 PM, Carbonicus wrote:

    Short away. This is a cult stock. It isn't making money on a GAAP basis.

  • Report this Comment On August 15, 2013, at 12:38 PM, Gavinsox wrote:

    I understand all the hype and emotion about Tesla and the need to replace the combustion engine and the quest for saving the environment. I am more concerned about the health effects from EMF and sitting on an $18,000 electric battery. For all you Tesla and electric car fans out there is anyone concerned about this. Also, electricity required to charge your batteries still predominantly comes from oil fired generators.

  • Report this Comment On August 15, 2013, at 12:52 PM, borlock wrote:

    Why is 100,000-200,000 units the saturation point for EV's? Why not 1 to 2 million units? Or 10 to 20 million? Or just 50'000?

    What original research did you do that makes you believe 100k-200k units is the magical number?

    If you take the cost of gas into account, the $35k car is closer to a $20k car. Who wouldn't like to get something that performs like a BMW 325 for $20k?

  • Report this Comment On August 15, 2013, at 1:03 PM, weaponz wrote:

    Did you fail to account that the Roadster 2.0 will be out in 2018 and that the Gen III consists of 2 vehicles? (a sedan and SUV)

    @Gavinsox - People have tested the Model S for EMF and found no issues. And I have no clue what country you live in, but oil makes less then 1% of the grid here in the US.

  • Report this Comment On August 15, 2013, at 1:07 PM, jamesdan567 wrote:

    "margin of safety" ?? What the hell is that? That's baloney and cannot be reliably quantified.

    Go ahead, short the stock author. All professionals will tell you "Never short a stock based on valuation", but go ahead, do it. Then report you did it. No one is interested in what you might do.

    We dont need fence sitters around here. Go LONG or Go Short or make strong recommendations to go LONG or SHORT or AVOID. Don't give us the wussy treatment with phrases like "I might go short"...those phrases are for little girls...

  • Report this Comment On August 15, 2013, at 1:09 PM, seattleDude wrote:

    I love Tesla, own a Model S, and was long the stock for a while, but people we live in the real world, you can't ignore valuations forever. When I hear "but this time it's different", it reminds me of the dot com bust of 2000. I have no doubt that Tesla will continue to be successful, but with a stock price that already assumes hundreds of thousands of sales, where does it go between now and the time these sales are actually happening? I don't believe that investors are that patient. I may not short it, but am waiting for a correction to jump back in.

  • Report this Comment On August 15, 2013, at 1:47 PM, JRUwing wrote:

    Amazing how these guys don't seem to understand business, example, "First, as component costs decline, Tesla will probably have to pass some of the savings along to customers." No, demand is so high it will just improve their margins. That is the whole point of building the higher end car in the first place and why Elon went into that market. Please short the stock and make it a big position, don't just do some wimpy short play, bet big.

  • Report this Comment On August 15, 2013, at 1:48 PM, Oseo wrote:

    The value of tesla stock has to do with understanding their rate of expansion, the lack of significant competition, and the size of the auto market. In other words, remember google? Remember apple? Remember the holahoop?

    Their revenue has grown by over 3000% this year while the price of the stock increased by a tenth of that. Why buy their stock? Because it is much more likely that you will not see these prices again. Tesla's track record has proven that. What is the silence you hear? It is the next quarterly report coming out to detail a yet another successful market share expansion internationally, exceeding more revenue targets, etc... It's another stock price point center. Why so sure? Because there is no one that has anything remotely competitive against what Tesla has. The demand they command is global. Even if you don't drive a Tesla, you are glad someone else does. That's because, when they go buy in the super-car sedan, they leave clean air and silence behind...

  • Report this Comment On August 15, 2013, at 1:58 PM, hunter3203 wrote:

    I too believe Tesla is grossly overvalued. They're a good company with a good plan but ultimately their share price has to be backed up by earnings.

    The problem with shorting the stock is that there are too many true believers out there supporting the stock price. It could be years before the stock is valued rationally.

  • Report this Comment On August 15, 2013, at 2:13 PM, vet212 wrote:

    When those who have bought those overpriced and underdelivering cars realize it the digestive byproduct will hit the rotating ventilation device same with his almost useless [low payload] space craft

  • Report this Comment On August 15, 2013, at 2:27 PM, drax7 wrote:

    Assuming they sell 50,000 cars next year and make net profit of 10,000 per car, that equates to $500 million. Being a high growth tech company assign them a p/e of 30 and that equals a $15 billion mkt cap. That translates to $130 per share. The market can only make guess estimates at this point, and given Elon's execution record this is very achievable.

    Once model x goes into production, double the figures and the price goes to $270 per share by the end of 2014. Today's stock price is very rationale.

  • Report this Comment On August 15, 2013, at 2:30 PM, mikecart1 wrote:

    TSLA articles always bring together the nicest and charming of internet commenters all in one thread - NOT!

  • Report this Comment On August 15, 2013, at 2:40 PM, Oseo wrote:

    What will happen in China? An unequaled expansion, by Tesla. Why? They are it in many ways. Please show us that chart...

  • Report this Comment On August 15, 2013, at 2:51 PM, hunter3203 wrote:

    drax7 - How did you determine they'd be able to produce 50k next year? Tesla has only said they would reach a production rate of 40k per year by the end of 2014. So their sales will likely be far less than 40k. The Model X isn't scheduled to released until the end of 2014.

    How do you think they'll hit a net profit of $10k per vehicle? There's no support for that conclusion and therefore your stock price projection.

  • Report this Comment On August 15, 2013, at 3:02 PM, SmartgridCI wrote:

    Interesting point of view. I would add that Musk's interest for other topics/ventures than Tesla may indicate that the company has now reached a threshold. On the other end, I am not sure the article captures the tremendous untapped potential represented by emergent markets (China in particular), the Middle East and Europe, including Russia.

  • Report this Comment On August 15, 2013, at 3:08 PM, FordRules wrote:

    Listen to all the elitists who call anyone who questions any aspects of Tesla (and EVs in general) "Luddites" and it's easy to get sucked into the base canard of how "progressive" these rich people's toys are. That's if "progress" means a return to the days of Pierce Arrow, Packard and Duesenberg. Back to the days when automobiles were only for the very rich. Back before Henry Ford built the $750 Model T for the mass market. If bourgeois snobs like Elon Musk get their way, the common man will only get to ride the bus or get mugged on the subway.

  • Report this Comment On August 15, 2013, at 3:39 PM, TheDumbMoney wrote:

    Adam, Mr. Miyagi say never short a stock based solely on valuation.

    A near-term expected catalyst is even more important than for a long. A cogent decline thesis is better (Paul Kedrosky has had a good decline thesis for Microsoft for years, since well before it became fashionable). But a discovery of accounting fraud is best.

    Valuation is the only real basis I see here for your proposed/possible short. Which isn't to say it won't ever work, depending upon your tolerance for pain.

  • Report this Comment On August 15, 2013, at 4:29 PM, ckgod wrote:

    @FordRules I can see why your views of the company and the car are all twisted when you use the words elitist, progressive and rich. Don't listen to Faux News these have absolutely nothing to do with why Tesla is popular. It's popular simply because it's the best car the money can buy and there is nothing like that on the market. A lot of people who buy the Model S have never bought a 50K+ car. There are two of those in my company, previous Prius and Lexus ES owners who bought a Tesla.

  • Report this Comment On August 15, 2013, at 5:04 PM, jonnyhawk wrote:

    Shorting TSLA is quite the proposition. If the Overall market gets shocked down 10-20%, It may hurt TSLA prices by 30-60%. A number that does not reflect a mismanaged company, but perhaps a market being pressed on by outside influences (maybe the FED). correct me if i am wrong but that is all the article is saying.

    In the short term. (a month or so) a drastically falling stock price is far more likely than a drastically growing price. Espeially if the "true believers" sell for fear of losing their 300%+ recent profit.

    Id also like to point out that 35% of the stock is held by insiders. I doubt Elon Musk will be selling his stocks unless it is to fund a hyper-train or something. But idk whether or not this is relevant.

    The question is Steady growth in stock price vs. violent crash?

    At Least that is my opinion on the matter. Someone comment on this, and some of the influences i proposed? I'm new at this and would like some experienced traders to comment on my thought process? opinions?

  • Report this Comment On August 15, 2013, at 5:25 PM, hunter3203 wrote:

    ckgod - You can't buy a Tesla for $50k. They start at $70k and the average transaction price is close to $100k due to so many of the early purchasers buying the Performance model. Slice it anyway you'd like, an average person can't afford a Model S, it's more than twice the price of the average vehicle.

    The Model S is successful at the market it's aimed at - mid size luxury sedans. It's competing against cars like the BMW 5 Series and Mercedes E Class. All of those cars are great but they're not aimed at a mass market. Mass market sedans are cars like the Ford Fusion, Honda Accord and Toyota Camry. An average family can buy one of those for less than $25k and that market is over 1 Mil vehicles annually.

  • Report this Comment On August 15, 2013, at 6:15 PM, buddyglee wrote:

    shorts are usually for the short term . probably a good short right now

    i absolutely love tesla though

  • Report this Comment On August 15, 2013, at 9:28 PM, Oseo wrote:

    Tesla achieved a revenue growth of over 4000% (four thousand percent) over the past three quarters. Their stock price grew by less than a tenth of that...

    The most important ratio: How are consumers living now vs how they can live with a product/infrastructure from a company. That ratio is very high in favor of Tesla. If you had a stock that started at $1 and then went up to $5, you would have a 500% increase, right? If the true price of that stock, by market forces still in the process of reconciling themselves was, say, $290, this “500% increase” would be un-impressive compared to where the stock is actually going. The discrimination in this analysis relates to the fact that Tesla is a new car company. In fact, it is the only successful new car company. It would be extremely difficult for one of the other car companies to achieve this level of growth because their market forces have already reached equilibrium. Thus, these growth rates for Tesla are to be expected and are, quite frankly, trivial to the growth that they are yet to achieve; given the context of the success of their business model and amazing total product (car, infrastructure, etc...). Once this existencial crisis within the financial analysis of Tesla vs other car companies is surpassed, a clear view of the prospects emerges. 

The unique circumstances for Tesla are clear: 

1- First truly successful electric vehicle platform (by any means of comparison to any other car of any type). Highest rating of any car ever.

2- Has quickly captured the market share (in 1 year!!!) for the price segment f it’s first model - % limited only by its first-year’s ability to produce the cars.

3- Has a streamlined, new-to-the-industry, ultra-efficient production process for a product with vastly less moving parts. The facility where they are located used to produce 500,000 gas-engine vehicles using a much less efficient process - Tesla is currently at just 4% of that capacity in that facility alone. Even by old efficiency standards, they could produce 25 times the volume they have now, just in that facility. Their production volumes are accelerating quickly.

4- Commands tremendous global demand. People are in line for months with thousands put upfront.

5- It is the only car company with the ability to dedicate itself exclusively to the perfect electric vehicle because the other companies are tied-down into gas-engine commitments for the vast majority of their profits. Tesla has invested decades exclusively to this purpose - that is how far ahead they are.

6- Gas engine cars and their infrastructure are depreciating even faster than before. Tesla cars, by definition, retain their value.

7- Tesla cars provide unprecedented, vastly unmet, environmental value to society. Even if you don’t have a Tesla, you are glad someone else does.

The core effect is that Tesla has a number of market forces pushing it to grow, not linearly, but exponentially. That means that the projections for Tesla today are much less than the projections for Tesla tomorrow. Investors are now having a clearer picture of what to do with a car company with prospects that are this amazing. The answer is obvious.

  • Report this Comment On August 16, 2013, at 12:06 AM, somethingnew wrote:

    I would never short this stock, not strictly because it's overvalued which it is, but because it's got a cultish fan base of investors combined with an insane amount of short interest -a possible perfect storm for the stock shooting to even more ridiculous levels -Momentum building onto more short sellers caving in and buying back their shares building onto more momentum as cultish fans of the stock hold on as the price soars higher adding even more momentum with each new investor who sees gains and decides to get in the game as well. I'm not saying it will happen this way just that it could happen. Seriously I think it's a bad idea. The greater fool theory could come full circle on this one. Eventually it will become a good short temporarily but the insanity in this one would keep me away. Very long term (10+ years) I think it will make a good investment. I just wouldn't buy or short at these prices and/or environment. Too volatile for my liking.

  • Report this Comment On August 16, 2013, at 2:37 AM, jonnyhawk wrote:

    good point, the result of momentum building on more short sellers...

  • Report this Comment On August 16, 2013, at 5:54 AM, andrewkelsey wrote:

    "By that time, there are likely to be viable competitors in the EV market, and the green car enthusiast market will be more or less saturated",

    There will be many competitors but Tesla has a good head start and since, in the long run, the whole car market is going electric we don't need to worry about green car enthusiasts running out. Batteries keep coming down in price and up in performance while oil just keeps going up. At some point everything will be EV or extended range EV. Tesla just has to survive until then. My guess is they'll make it.

  • Report this Comment On August 16, 2013, at 8:15 AM, drax7 wrote:

    At hunter3203, during conference Elon mentioned that sales would conservatively be 40,000 next year, i think they will be 50,000 conservatively as USA china and Europe get going. Elon was being cautious in order to avoid forecasting issues. Production is increasing at a faster pace than anticipated as the supply chain gets more efficient.

    All the forces of nature are conspiring to make this happen, and for the right reason.

  • Report this Comment On August 16, 2013, at 8:18 AM, drax7 wrote:

    EV is the future, tesla has a first mover advantage and the lead is increasing. The addressable market is gigantic, the disruption is unreal, if they execute as well as they have so far, the firm will reach mega cap status.

  • Report this Comment On August 16, 2013, at 12:53 PM, davaidesign wrote:

    I'll take "Stupid things to do with my money" for 400. Tesla may be expensive, but shorting it is a race between the contents of your wallet and market perception.

  • Report this Comment On August 16, 2013, at 5:20 PM, TheRealRacc wrote:

    I think these comments speak for themselves. Shorting TSLA does sound like a great idea.

  • Report this Comment On August 17, 2013, at 1:59 AM, somethingnew wrote:

    @davaidesign, yes, basically high stakes poker.

  • Report this Comment On August 17, 2013, at 6:52 PM, arondaniel wrote:

    By all means short away but keep this in mind:

    * Tesla has managed to create the top rated car their first time out of the gate (not counting roadster, which was built on Lotus gliders). Not the top rated electric car, the top rated CAR.

    * Tesla has the "recharging problem", to the extent there ever was one, solved. This, along with the high price of the cars, was the last barrier to widespread adoption.

    * There are forces preventing legacy automakers from building a better Model S. Partially because of patents, first-mover advantages and network effects. Mostly, I believe, because the dealerships won't stand for it and they really just want to sell hybrids and diesels anyway.

    * Climate change is real (sorry, flat-earth people!) and it is not a trillion dollar economic shock. It is a quadrillion dollar economic shock. That shock will sink many boats and lift few...

  • Report this Comment On August 19, 2013, at 10:38 AM, TMFGemHunter wrote:

    Thanks for the comments everybody. I obviously can't respond to every single one, but I wanted to add a few things.

    1) Obviously there are big risks involved in shorting any stock, particularly one with good momentum and high short interest (i.e. Tesla). I don't agree with the idea that you can't short a stock based solely on valuation. That said, it requires a VERY high tolerance for risk/pain. If I opened an outright short, I would start fairly small with the idea of increasing my position if the stock moved significantly higher. However, I'd be more likely to play this with put options. That allows you to essentially define your own risk.

    2) If you think that Tesla has no competitors and will never have serious competitors in the EV market, it's probably a great investment. I'm very skeptical of that view. Every automaker understands the potential significance of the market. It's not at all like the iPhone (where BlackBerry execs mocked the idea of having music or a camera on a phone).

    The best bull case I can think of is that if Tesla can quickly build up enough purchasing scale to be the largest buyer of batteries in the world by far, it could potentially have a long-term cost advantage vis-a-vis competitors. Otherwise, I don't see how 25% margins are sustainable once an "affordable" car comes to market.

    Competitors will make very good EVs. There's a humongous incentive there: mass automakers do not earn 25% gross margin today! People who need an affordable car will not pay a 20% premium for a Tesla. They might not even pay a 10% premium. $35K is a LOT of money for most people in the country... let alone the world.

    3) I think that the market for EVs will be very large, but I would be VERY surprised if EVs make up the majority of the auto market even 50 years from now. ICE will still be viable, and there will probably be other alternative fuels like natural gas and/or hydrogen fuel cells. Moreover, the vast majority of the market will be cheap EVs. Think along the lines of the Chevy Spark more than anything Tesla would bring to market.

    Adam

  • Report this Comment On August 29, 2013, at 6:57 PM, dalepen wrote:

    They don't make any money.

    They have and are stealing from us schmuck taxpayers to enhance revenue. A classic crony capitalist company!

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