The 1 Thing You Probably Don't Know About Tesla Motors' Short-Sellers

Hello. My name is Sean, and I am currently short shares of electric vehicle manufacturer Tesla Motors (NASDAQ: TSLA  ) .

I've always considered myself something of a contrarian and underdog investor, looking for buying opportunities in downtrodden stocks that Wall Street has cast away, while betting against companies that can seemingly do no wrong.

Understanding the anatomy of a Tesla short-seller
Because I'm short shares of Tesla I've been called about every name in the book, ranging from clinically insane to downright stubborn for standing in the way of its innovative capacity. Apparently, though, I'm not alone. As of Friday there were 31.3 million shares of Tesla Motors currently held by short-sellers. That represents 39.1% of the total float and is closing in on Tesla's all-time record number of short shares held of 32.3 million, which was set about a year ago.

But, there's likely one thing you probably don't understand about the majority of Tesla short-sellers like myself: We don't actually think Tesla will fail.

Source: Tesla Motors.

On the contrary, I commend CEO Elon Musk and Tesla for introducing the first successful new vehicle brand in 50 years and for claiming the 2013 Motor Trend Car of the Year award. Tesla's Model S offers a clear comparative advantage over existing EVs out on the road in terms of safety, lack of mechanical issues/recalls, and, most importantly, driving range, having doubled or tripled its best-selling competitors in that category.

Instead, the majority of short-sellers merely have a problem with the way Wall Street and investors are treating Tesla's comparative advantage. This isn't a question of whether or not Tesla Motors is going to survive -- I believe the fact that it's not had to spend a cent on advertising proves that the Model S is practically selling itself in its early stages of production -- it's a question of how much Tesla's comparative advantage is really worth. For short-sellers like myself, we would contend significantly less than where Tesla is currently valued.

The Gigafactory is a huge question mark
In particular, the market and investors seem willing to ignore obvious expansion risks that short-sellers appear obviously skeptical over.

Just last weekend we examined the rewards as well as the risks associated with expanding Tesla's operations through its Gigafactory. While it could revolutionize battery production and help lower battery pack pricing to affordable levels for many consumers, the Gigafactory isn't without a number of major risks.


Source: Tesla Motors.

Although you can read these five risks in considerably better detail here, here are the three primary concerns I have as a short-seller given the immensity of expansion:

  • Tesla has no manufacturing experience in lithium-ion battery production or scaling up an LI-battery facility.
  • The margins on current LI-battery facilities are in the low single digits and may not prove meaningful. Tesla's Gigafactory should be more efficient, but it'll also be splitting some of those profits with its partners.
  • Most worrisome is what happens if a more efficient battery technology comes along. It's not going to be easy for Tesla to simple rejigger its operations with up to a 10 million-square-foot facility dedicated to LI-batteries.

But there could be even more immediate risks
However, there are risks that aren't being accounted for well beyond just the Gigafactory. There are a number of existing expansion concerns that should have investors treading cautiously around Tesla, yet many are willing to look the other way.

Perhaps the most blatant smack in the face comes from the fact that Tesla is still losing money on a GAAP basis (which includes stock-based compensation and special accounting for resale value guarantees). Its $0.16-per-share loss in the fourth quarter was lower than the year-ago quarter but still points to a company struggling to find its breakeven profit point despite a valuation that crept above $30 billion just two weeks ago.

The common retort to Tesla's GAAP losses from optimists is simply that Tesla's technology is unparalleled, and that in a decade's time Tesla's EVs could be dominating our roadways. But where is the premium for Ford (NYSE: F  ) , which a few years ago introduced the EcoBoost engine, which can run on far less gasoline thanks to superchargers, but still produces ample horsepower when needed? You can find its EcoBoost engines in all vehicles, from smaller cars to trucks, and this engine technology is likely to find its way into as many Ford vehicles this year as it did in the 2009-2012 years combined! Is Wall Street giving Ford a huge premium for this technological advance? Nope! So why are we giving Tesla a mammoth multiple for its EV technology?

Another concern that I've hit on multiple times is the exclusionary nature of the Model S. On one hand, the Model S perfectly appeals to environmentally conscious consumers, and it offers incredibly sleek and fresh styling. But the reality is that its price point, which starts north of $70,000 and can range up to $110,000, will price most Americans out of owning one.

If the price isn't what gets you, perhaps simple geographical location will.


Source: Tesla Motors, supercharging station map current as of March 15, 2014. 

While Tesla is currently working on a supercharger network that will span the country and allow owners of its EVs to travel anywhere, the current supercharger network of just 79 stations leaves a lot to be desired. If you live anywhere outside these EV bubbles, you can forget about any extended road trips in your car without potentially lengthy stops to charge up. In addition, charging up can be a problem in itself for people who live in apartments, condos, or highly populated metros.

The last straw is simply Tesla's valuation compared with how many EVs its capable of producing. Toyota  (NYSE: TM  ) and General Motors (NYSE: GM  ) sold 9.98 million and 9.71 million vehicles throughout the world in fiscal 2013. Both companies are currently valued by the market at $172.3 billion and $54.2 billion, respectively. Considering that GM only exited a bankruptcy reorganization a few years ago and is dealing with a huge recall at the moment, I can somewhat understand the big market value gap between the two. Tesla, though, is only projecting that 35,000 EVs will be produced in fiscal 2014, yet it boasts a $28.5 billion valuation -- that's almost $813,000 per car! Does that make sense to you?

In sum, we short-sellers are willing to accept being called stubborn and insane by current shareholders, but we also recognize that bulls just might be even crazier than we are by bidding Tesla even higher.

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Read/Post Comments (10) | Recommend This Article (3)

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 March 16, 2014, at 1:25 PM, drax7 wrote:

    The same old rehashed bearish points that have been discredited repeatedly. Same arguments can be made against amazon, it should have walmarts valuation blah blah.

    Musk has put a rocket in space, repeatedly and successfully . A Battery factory in comparison is a joke in engineering terms.

    With Musk you buy optionalality, wake up and be a contrarian.

  • Report this Comment On March 16, 2014, at 1:38 PM, RobertFaheyJr wrote:

    I agree that TSLA longs and shorts can coexist in harmony on this stock. Just depends on approach. I'm long, and totally unconcerned about milking the ebb and flow along the way. But hey, if you've got the cojones, you could indeed get a meal or two from the dips.

  • Report this Comment On March 16, 2014, at 1:46 PM, AdvanderMeer wrote:

    While you maybe right on your analysis in Tesla´s business risks, you may be wrong on the direction of TSLA the stock.

    Musk has a very good track record on getting things done. Before Spacex he had no experience in the rocket business and look where they are now. There are just too many people who believe in Musk and are willing to put their money in.

    My advice to you: If you don't believe Musk and his team can get it done, just stay out. Shorting TSLA can cost you your shirt.

  • Report this Comment On March 16, 2014, at 2:01 PM, weaponz wrote:

    There are plenty of mistakes you are making though.

    "Tesla has no manufacturing experience in lithium-ion battery production or scaling up an LI-battery facility."

    Tesla has experience in producing batteries, they don't have experience in mass producing them. But they had no experience building cars and SpaceX had no experience launching rockets. All they are saying is they haven't done it before, but that doesn't mean they don't know how to do it. Plus they will have a partner like Panasonic who does.

    "The margins on current LI-battery facilities are in the low single digits and may not prove meaningful. Tesla's Gigafactory should be more efficient, but it'll also be splitting some of those profits with its partners."

    The margins are high single digits and growing actually.

    "Most worrisome is what happens if a more efficient battery technology comes along. It's not going to be easy for Tesla to simple rejigger its operations with up to a 10 million-square-foot facility dedicated to LI-batteries."

    That is a silly worry. Even if a new technology becomes available tomorrow. By the time economies of scale and testing finishes we will already be in 2020. What many people don't realize is the technology we use today is always old technology. if there was a new technology close to being complete, we would know about it by now.

    "The common retort to Tesla's GAAP losses from optimists is simply that Tesla's technology is unparalleled, and that in a decade's time Tesla's EVs could be dominating our roadways."

    No, the common retort would be that non-GAAP is more accurate. Also, look at gross margins. And lastly, for a growth company, reporting net profit is useless. The profit is better reinvested into growth to make use of first mover advantage (see amazon).

    "Another concern that I've hit on multiple times is the exclusionary nature of the Model S. On one hand, the Model S perfectly appeals to environmentally conscious consumers, and it offers incredibly sleek and fresh styling. But the reality is that its price point, which starts north of $70,000 and can range up to $110,000, will price most Americans out of owning one."

    Tesla appeals to a wide audience, environmentally conscious is just 1 of the many groups Tesla appeals to. And also, the whole point of the factory is a 35k Tesla Model E.

    "While Tesla is currently working on a supercharger network that will span the country and allow owners of its EVs to travel anywhere, the current supercharger network of just 79 stations leaves a lot to be desired"

    This is where most people lose sight of the meaning of investment. Investment is about growth, if your judging things by today then your missing out on a lot of investment. That is like looking at a baby and saying, there is no way he will get anywhere, he can't even speak words. By end of 2015, Tesla will cover 98% of the country.

    "Tesla, though, is only projecting that 35,000 EVs will be produced in fiscal 2014, yet it boasts a $28.5 billion valuation -- that's almost $813,000 per car! Does that make sense to you?"

    Again, short sighted. Also Tesla will most likely beat the 35k number.

  • Report this Comment On March 16, 2014, at 2:17 PM, Pixma25 wrote:

    Compare the production and market cap of Tesla vs. Porsche. Now tell us about the growth potential of Tesla vs. Porsche.

    Comparing Tesla to GM or Ford or Toyota is comparing Rolex to Timex.

  • Report this Comment On March 16, 2014, at 2:19 PM, EricAnderson12 wrote:

    Always remember that The market can stay irrational much longer than you can stay solvent.

  • Report this Comment On March 16, 2014, at 3:55 PM, FTownBryan wrote:

    I agree with the author that the risk/reward dynamic has changed. In fact, my last positions are hedged to lock in a floor until I get to long-term tax treatment next week, when I plan to sell. This has been my 2nd best investment ever and it's been quite a fun ride. My gains amount to more than two fully loaded P85's. I hope for another opportunity to go long in the future.

    That being said, TSLA is a story stock and could trade at obscene multiples very long term. I believe only a fool (not speaking figuratively) would short a story stock.

  • Report this Comment On March 17, 2014, at 12:07 AM, dlwatib wrote:

    I sold when Tesla stopped advancing at 249.70. For now the market appears to be correcting. It remains to be seen how low it will go, but I believe that 30% lower is perfectly justified by current economic and political conditions. That said, I intend to buy back Tesla as soon as the market stabilizes. In a bull market, especially a fresh one after a satisfying correction, Tesla could easily reach $500 or even $1000 per share. Tesla is the future of the auto industry. Each and every sale of a Model S, a Model X and a Model E will come out of the market share of a more established auto manufacturer. Given such potential, one could justify a market cap equal to Toyota.

  • Report this Comment On March 17, 2014, at 5:19 AM, mauiguy wrote:

    Where does everyone get this inflated figure of a Tesla costing North on $70,000?

    I wish they would just go to their website.

    My base model Tesla is costing me $54,000 in California, (after Federal tax credits of $7,500 and State tax credits of $2,500). I don't need no stinking leather seats, better sound system, high tech package!)

    Just give me the 60kw version of the BEST CAR on the road, and I'm happy!

    So, stop this BS $70,000+ short tactic!

  • Report this Comment On March 18, 2014, at 1:13 AM, youngblood58 wrote:

    Shorts have been getting hammered for 4 years now. Perhaps it's time they get their due, but time and again I see "story stocks" like this (Netflix, Amazon, etc.) blow through previous levels. I wouldn't be shocked if Tesla hit $300 or $150/share in the next few months.

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