A Securities and Exchange Commission (SEC) filing recently revealed that Michael Burry, the investor made famous from predicting and profiting from the subprime mortgage crisis, is betting against Tesla (TSLA -1.92%) shares. His firm, Scion Asset Management, owned puts that gave him a bet against more than 800,000 shares of Tesla as of March 31. Though the details of the put contracts or unknown, investors profit from puts when the prices of the stocks they are betting against decline.
Despite Burry's success in profiting from the subprime mortgage crisis, investors should think twice before they follow in the famed investor's footsteps with a similar move.
Here are three specific reasons I wouldn't bet against the growth stock.
Model Y. Image source: Tesla.
1. Explosive sales growth
There are certainly some concerns about Tesla's business. One issue Burry has brought up is that the electric-car maker has relied heavily on selling its zero-emission regulatory credits to other automakers for its profitability. In Tesla's first quarter of 2021, for instance, $518 million of the company's $594 million of income from operations came from sales of regulatory credits.
But there's one thing Tesla has going for it that any investor betting against the stock should consider carefully: Its vehicle sales are skyrocketing, capturing both the company's aggressive expansion and consumers' growing interest in Tesla's products. Trailing-12-month vehicle deliveries are up 52% year over year -- and management expects similar or even better growth for full-year 2021 deliveries.
If Tesla can keep up this strong sales growth in the coming years, it's possible that the automaker will benefit from significant economies of scale. Indeed, Tesla management expects exactly this. The company regularly tells investors that as sales grow it expects its operating margin to continue to widen, eventually reaching "industry-leading levels."
2. A massive market opportunity
It's also worth noting that electric vehicles still represent a tiny fraction of the overall auto market. Indeed, internal combustion vehicles accounted for 97% of vehicles sold globally last year, Tesla asserted in its first-quarter update. If vehicle sales hit a tipping point in which electric vehicles become the preferred new car choice, Tesla will be positioned well to benefit from a massive tailwind from one of the biggest industry markets in the world.
3. It's OK to watch from the sidelines
Finally, it's perfectly fine to stay on the sidelines of a polarizing stock like Tesla. Whether you believe in the company's long-term potential or are skeptical about its financials or its high valuation, this doesn't mean you have to place a financial bet for or against the stock.
The reality is that the automaker's mix of rapid business growth and sky-high valuation has made it difficult to form a good opinion on the stock. Sure, the company seems to be executing extraordinarily well. But strong execution for years to come is priced in. For shares to outperform the market over the long haul, Tesla will need to maintain its leadership, continue growing rapidly, and execute well on its more speculative initiatives like autonomous driving and its nascent energy business. On the other hand, betting against Tesla amid such incredible growth and execution seems particularly risky.
Fortunately, however, there's no need for investors to do anything. Sitting on the sidelines is totally fine.
