Is Tesla Headed for a Cliff?

This week, JPMorgan Chase (JPM 1.94%) made headlines by predicting that Tesla (TSLA -3.40%) would fall a whopping 40% in the next 12 months. Tesla is having its fair share of troubles with production issues and debt, but a 40% short stake is still leaving many analysts shocked.

In this today's episode of Market Foolery, Chris Hill talks with Motley Fool analyst Tim Hanson, about why he agrees that Tesla is headed for the hills, and what it means for Tesla's future as a public company. Also, the hosts talk about earnings from lululemon athletica (LULU 2.64%), and introduce listeners to the Fool 100 Index -- a market-cap-weighted index of The Motley Fool's 100 biggest ideas.

A full transcript follows the video.

This video was recorded on Dec. 7, 2017.

Chris Hill: It's Thursday, Dec. 7. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, it's been a while, investor at large, Tim Hanson.

Tim Hanson: Did I do something wrong?

Hill: [laughs] You're busy! Not that the other people aren't busy.

Hanson: What does that say about poor Jason Moser? [laughs] 

Hill: Everybody's busy. It's good to see you!

Hanson: Thank you!

Hill: Thanks for being here!

Hanson: A pleasure!

Hill: We have couple of things to get into, including what you've been working on, and I want to get to what appears to be your latest personal financial decision, which you tweeted about. But let's start with lululemon athletica.

Hanson: Thanks for following me on Twitter!

Hill: I love following you on Twitter. Here's why I love following you on Twitter. You don't tweet all that often, so when you do, it's valuable stuff, it's fun stuff. And it's a good mix.

Hanson: I try. Get the bang for my buck, that's how I try to run my life. As little as possible to make it all meaningful.

Hill: There are some people who I genuinely like a great deal who I had to stop following on Twitter because they tweet too much.

Hanson: Does it rhyme with "till han"?

Hill: Um... let me put it this way. I stopped following someone who, it was revealed by our producer Dan Boyd on last week's bonus episode, this person blocked him on Twitter. And for those of you who may have not caught the bonus episode, if you have an hour and eight minutes to kill, I highly recommend it. It's some fun stuff. But Dan, just in case folks didn't listen, what prominent --

Hanson: I hope it's Trump. Is it Trump?

Hill: No.

Hanson: Aw!

Hill: You might like this even more. What prominent financial media personality blocked you on Twitter?

Dan Boyd: Well, Chris, that would be Morgan Housel.

Hanson: Wow!

Hill: And we don't know why. Which, to me, makes it even better.

Hanson: That's incredible!

Hill: We're already far afield. God, it's like Barker is in the studio with us.

Boyd: Actually, do you know how I figured that out? It was a conversation between you, Tim, and him a few weeks ago or less month or something. I saw your tweets and I couldn't see who you were responding to, and I was like, who is he responding to? And I figured it out, it was Morgan.

Hanson: That's a hard way to find out, too. That's like catching your girlfriend on a date with another person.

Hill: "I thought we had something, honey!"

Hanson: Yeah, exactly.

Hill: Let's get back to lululemon athletica. They had some pretty good third-quarter results, but it was their guidance for the holiday quarter that's really pushing the stock up 8%. The stock is now at a 52-week high. It seems like they're having some success in men's apparel, which is great. But I'm most curious about this, and that is, how are you feeling about holiday retail? This is something we've talked about on this podcast, on Motley Fool Money. I don't want to jinx things, but it seems like this is one more retailer that's coming out and stating for the record that they feel pretty good about their prospects, which gives me some encouragement.

Hanson: Yeah, I think it's going to be a very positive holiday season. All the indicators seem to point to strong consumer confidence, people opening up their pocketbooks for spending. When you refer to retail writ large, people buying stuff, I think it's going to be a good season. Having said that, I think within the retail space, there are going to be definite winners and losers. Lululemon sticks out because of its recent strong performance relative to companies like Under Armour (UAA 0.74%) (UA 1.39%), Nike (NKE -0.36%), who have been struggling a little bit, even though you would argue they're in the same premium sportswear space.

I think what it comes down to is, you want a retailer who's not in the mall. Because I don't think people are shopping at malls as much anymore. They're shopping on High Street, more of a destination shopping downtown type store. And Lululemon obviously has a lot of boutiques in that type of place, or they're shopping online, so you want to have a strong direct-to-consumer presence.

And additionally, going online, there's a lot of comparison shopping, so if you're going to have a strong and profitable DTC business, you have to have a good brand. You can't stick out by pricing, because there's discounting everywhere. For you to stick out, people have to be seeking out your product. It has to be specialized and differentiated. Lululemon has an up-and-down history in that regard, but apparently right now they're on the rise a little bit.

Hill: And particularly in comparison to, as you said, Nike and Under Armour, because you can go back three or four years and I think it was about that time that those two companies looked at lululemon athletica and what they were doing with yoga wear and, I don't like this word, but, athleisure wear, and said, "We can do that." And people thought, if Under Armour has a good brand, Nike has a good brand, if they're going to sell $60 yoga pants as opposed to $100 yoga pants, then they're going to win out. And Lululemon really does seem to have some pricing power, along with, as you said, the operational excellence that they're demonstrating right now.

Hanson: Under Armour also, from a pricing perspective, shot themselves in a foot a little bit. If I recall correctly, they had Dick's Sporting Goods (DKS 1.84%) as an exclusive retailer of their wares, and in the pursuit of sales growth, I think they brought on one of the discounters like Marshall's or TJ Maxx or one of those types of stores. And they gave them the same inventory. So the discerning shopper could either pay full price at Dick's or less price at that other shop. Obviously, they went to the other place, which cannibalized Dick's sales, obviously hurt that partnership between the two companies, which I think Under Armour is still trying to recover from, and also compromised the brand power there as well. So when you stick with margins, you're going to suffer a little sales sometimes, but I think from a long-term perspective, it's the way to go.

Hill: Here's the tweet that I was referring to from Tim Hanson's Twitter feed. You had tweeted out this...

Hanson: Headline.

Hill: Headline that JPMorgan has a new short idea: Tesla shares to fall 40% in 12 months. That's a pretty bold move by JPMorgan, because I'm not saying Tesla won't fall 40% in the next 12 months, but I would have no interest in shorting that stock. And yet, not that I think you're shorting the stock, I don't think you're shorting it.

Hanson: No, not shorting the stock.

Hill: But a little option play for you?

Hanson: Yeah, I have some puts. It's almost like JPMorgan has been reading my email. No, full disclosure, I have two sets. I have January 2019, $150 puts. That means Tesla has to fall about 50%. And then, I have January 2020, $50 puts. So, obviously, Tesla has to fall a lot more for that one.

Now, they're cheap. There's not a lot of capital at risk to make many multiples on your investment. But I think the case for it is, Tesla has a reckoning coming on its balance sheet. They're burning through about $1 billion every quarter. They have cash on hand right now of about $3.5 billion, and another $500 million on a credit line, so that's $4 billion. One times four is four, so they have about a year's worth of cash left. I checked the math on that. Bloomberg had a piece out that said they think Tesla is going to run out of cash on Aug. 6 of next year.

Hill: I saw that. They got it down to the exact day.

Hanson: And in the past, Tesla has been able to handle the situation because they continue to raise more and more money. They sell equity to very excited shareholders, or they've been able to sell convertible debt, so on and so forth. Well, that convertible debt is starting to come due. They have almost $1 billion of it due in March of 2019, and the strike price, the conversion price on that, is about $360 a share. They're at $300 now. If they need to fill this cash hole by selling stock, odds are the stock is going to come down. That looks like that debt is going to have to be repaid rather than get converted, as you expected in the past. Then, additionally, they have more convertible coming in after that. The last time they went out to get capital was August of 2015. The most recent capital raising, they had to raise money at 5.3% which is a relatively high interest rate relative to --

Hill: What we're seeing now.

Hanson: -- what other people are getting right now. Obviously, they've had trouble with the Model 3 getting out, it's not at scale. Did some research, it's not clear they even have the permits to produce as many Model 3s as they're targeting to produce. 

Hill: That seems like a box you would want to check.

Hanson: Yeah, it does. This is a company that, as great as people perceive Elon Musk to be, his companies do have a track record for over-promising and under-delivering. Or, in the case of the X-Wing Tesla, having serious productions setbacks as they try to get it to scale. So, the thing about options, timing matters. If you're right but the time expires before you're right, you lose. I think, in Tesla's case, they've been able to keep pushing time out, pushing that reckoning farther out on the calendar. But I think the combination of Model 3 struggles, debt starting to come do, them clearly needing to raise money in somewhat of the distressed situation, I think it means bad things for the equity, because, common stock, when things go awry, it comes last.

Hill: And it's not to say that they can't raise more money sometime in 2018. It's just that the terms probably won't be what they're looking for.

Hanson: Yeah. If they weren't able to sell a convertible last time, it leads me to believe that the market for people buying convertible debt from Tesla is not there. So they're looking at straight debt. If they got 5.3 last time, this time it will be higher. Interest rates are up, and the company is in less good condition. If they do choose to sell a whole lot of equity well below the conversion price of that convertible debt, just to give you a sense, they have convertibles, they have another tranche of $1.4 billion of convertibles at $360 coming due in March 2021. If they sell, it looks like they have a $5 [billion]-$6 billion hole to fill, which is, you know, big, and I think about 10% of their market cap. If you sell that much equity, the stock is obviously going to drop.

Hill: Here's another thing you tweeted out recently. This is something you have been working on, which I've been curious about. It's the Fool 100 Index. Working backwards on that phrase, best I can discern, this appears to be an index of 100 stocks in the Motley Fool universe. Do I have that right?

Hanson: Nailed it. And I'm glad the name is immediately interpretable. 

Hill: I appreciate that. Increasingly. I forgot who I was talking to recently. I don't even remember what the topic was. I just remember being confused by whatever was being presented. And I just said, I don't know what that is.

Hanson: Just call it what it is.

Hill: Just tell me what this thing is. To the extent that you can share details, what is the Fool 100 Index?

Hanson: The Fool 100 Index is live. It's being published daily. It's a strategy index not unlike the S&P 500 or S&P 100 Growth or something like that. Basically, what it is, it's a market cap-weighted index of the 100 largest ideas that the Fool has a positive opinion of. We take all of the research services that we have, and use our Fool IQ database to create a list of a constrained universe of stocks that we say, hey, The Motley Fool thinks these are all good stocks. We take the 100 largest, market cap weight them into an index. We have back tested that performance back to 2007, and it's outperformed the S&P 500 by a little more than 250 basis points annually, which is pretty solid. Basically, it does what any index is supposed to do: It's supposed to reflect the general performance of the Fool investing universe. What you can do with that, on the flip side, is that you, Chris, can compare yourself against us and say, I can beat the Fool, or, I can't beat the Fool.

Hill: How come I'm not running my own service? I'm crushing this index.

Hanson: [laughs] Additionally, you can use it, when you see the market is up today, you can look at the Fool 100 and see if The Fool 100 is up or down. Additionally, because it's a market cap-weighted index, it's rebalanced quarterly, it's completely investable. So it could be used as the source of an index-linked investing product like an ETF or something like that in the future. Obviously, passive investing is all the rage with kids these days, so having something that can potentially serve that market is interesting for us.

Hill: If you want more details, you can go to fool100.com. Interesting stuff.

Hanson: Yeah, you can see the methodology, constituents, what's in it, how it's done, all that stuff.

Hill: A couple housekeeping notes before we wrap up. This weekend, on Motley Fool Money, Robert Brokamp, retirement expert here at the Fool, is going to be our guest. We'll talk about some end-of-year investing tips. Also, a reminder that tomorrow, Friday, Dec. 8, we're going to be taping Motley Fool Money at Chatter in Washington, D.C. This is at 5247 Wisconsin Ave. in northwest D.C. Come on by. We're going to start taping around 11:30 in the morning. Then stick around and have a bite to eat afterwards.

Hanson: It sounds like fun.

Hill: Yeah, it will be fun. Speaking of fun, Sunday morning, are you doing this race?

Hanson: I think I'm going to pass. It looks cold and my legs are tired. I defer making a decision to the last possible moment.

Hill: This is Pacers, which is a wonderful local D.C. chain of running apparel, running shoe stores. Pacers also puts on several races every year. They do the GW Parkway race in April that you and I have done.

Hanson: It's a good one.

Hill: Great race. There's a race this Sunday in Washington D.C., the Jingle All the Way. There's a 5K race and a 15K race. I thought you were hedging your bets on whether or not to race because of the notice that Pacers sent out that the race might not happen if there's a government shutdown, because part or all of the race is on federal property. So they're like, by the way, Friday night at midnight, the government runs out of money, and if the government is shut down then we can't have the race. So I thought that's why you were hedging your bets.

Hanson: That adds to my hedge right there.

Hill: But it's the cold.

Hanson: It's the cold. I went out and did the Turkey Trot for Thanksgiving, left it all out there, and my legs have not quite recovered since then.

Hill: Your legs are angry.

Hanson: I was very happy with that. I had a good result, so I'm giving myself a week off.

Hill: Alright. Tim Hanson, follow him on Twitter. Thanks for being here!

Hanson: [laughs] Thanks, guys!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see next week.