Why Tesla Motors Is the Wrong Stock to Short

Source: Bloomberg.

New York University finance professor Aswath Damodaran has done his math. By his estimates, Tesla Motors (NASDAQ: TSLA  ) is worth $67.12 per share -- far below its market price around $168. This is great news for investors shorting the stock, right? Not necessarily. The stock may be wildly overvalued by his calculations, but he has no plan to short the stock.

Shorting on the basis of overvaluation is a gamble
It's intriguing that Damodaran, often referred to as the "valuation expert," doesn't feel compelled to short Tesla. After all, he thinks shares are trading about 2.5 times higher than they should be. Even so, two times in his latest blog post on Tesla he expressed that he would not short Tesla.

  1. "I don't have a short position on the stock, and don't plan to."
  2. "Given my fear of getting whipsawed in the momentum game, I would not sell short either."

Instead, his conclusion focused on potential Tesla investors: "but all I would take out of that valuation is that I would not buy Tesla at today's price."

When it's all said and done, to short a stock simply because it's overvalued is a dangerous game.

John Del Vecchio and Tom Jacobs' thoughts on short-selling provide some of the most coherent reasoning on this mentality. In their book What's Behind the Numbers? John and Tom explain:

This book does not advocate or explain shorting or selling based on overvaluation. ... Why are these poor bases for shorting? Because overvaluation can continue indefinitely. ... Shorting or selling on those bases is simply too hard, risky, and unnecessary. We recommend waiting until there is aggressive revenue recognition, weakening balance sheets, and deteriorating cash flow trends. It's the flipside of value-with-catalyst, which is fundamental analysis of value combined with a catalyst for stock market buying to boost the price to realize that value. So, too, on the short side. Wait until there are negative catalysts for profits in the near future -- a year or two at most, the rough time period that the value-with-catalyst investor seeks. It's easier and more effective, the equivalent of "don't fire until you see the whites of their eyes."

Tesla currently sells every car it can make. There aren't any near-term negative catalysts in sight. In fact, profitability is expected to increase dramatically over the next two quarters. Even more, a close look at the financial statements and commentary from management in earnings calls reveals that Tesla's ambitious aspirations for high levels of profitability are basically already in the bag.

Sure, Tesla may be overvalued. But shorting Tesla at today's market price is just as much of a gamble (maybe even more) than buying Tesla.

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Read/Post Comments (5) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2013, at 7:05 PM, StanO6 wrote:

    @DanielSparks I agree completely. Why? Because the S is rated "over-the-top" for quality and safety. Elon Musk is delivering everything++. TeslaMotors is getting world-wide attention. I believe that the stock will break through $200 after Mr. Musk's road-trip across America.

  • Report this Comment On September 09, 2013, at 10:51 AM, rhealth wrote:

    Nice Job! One of the few good, balanced articles on Tesla out there and an excellent explanation of when to short.

  • Report this Comment On September 09, 2013, at 10:54 AM, TMFMarlowe wrote:

    It's an old, old axiom: The market can stay irrational for longer than you can stay solvent.

    Nice piece, Daniel.

    John Rosevear

  • Report this Comment On September 09, 2013, at 12:10 PM, jetamerica wrote:

    I shorted TSLA at$148 and $164 and plan to stay short in the near term.

    Everything with TSLA is on the come. Unlike Apple, with a bread and butter product having mass appeal. TSLA's "bread and butter" car is several years out. This S has sold in small numbers only because of massive government financial assistance. Musk does a superb job in his businesses by getting the taxpayer to assist his enterprises with massive financial assistance. The mass market model will require 20 times the S annual sales. Both a manufacturing and a distribution challenge.

    Ford with 6.5 million annual unit sales has daily sales close to TSLA annual sales. TSLA HOPE within 4 years to increase that to 300,000. Very unlikely.

    The S is a nice car and does break some new ground, but any manufacturer who does not need to show real profits can build a similar car for less and has the channels to sell it.

  • Report this Comment On September 09, 2013, at 5:21 PM, JEnsign57 wrote:

    I don't get you guys. . . I mean, I do get the part about never saying anything negative (even if obviously true) about a stock you've been touting. But this needing to see a catalyst for the fall of a massively overpriced stock? If you're a disciplined investor, patience is required on the long side; ditto on the short side. One can easily short this bloated tulip, so long as one is willing to take a one to two year time horizon. If the stock cracks by 50%, that's a huge return on an annualized basis. The stock pays no dividend (and likely never will), so there's no cost to being short. There is no valuation model that gets this stock even close to its current price, but there are plenty of things (e.g., a secondary offering needed to ramp up production, a downturn in the auto sector) that could cut the stock down to $70 or $80/share.

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