Shares of Tesla Motors (TSLA 2.76%) earlier this week touched $200 per share for the first time in its history -- a valuation that at one point pegged Tesla at a whopping $25 billion, making it worth nearly half of General Motors (GM 3.45%), which currently commands just a $56.5 billion valuation.
While most investors are cheering on this astronomical rally, which has seen Tesla shares sextuple in less than a year, I couldn't be more opposed to it. You see, I'm one of the very few brazen investors with the guts (or insanity) to bet against Tesla Motors. On Monday, I added to my existing short position in spite of recent strength in the company.
Before I review why I'm short and lend my opinion on why I added to my short position, let's have a look at the bullish side of the argument so that we can have a better understanding of why Tesla shares have rallied as furiously as they have over the past year.
Source: Tesla Motors.
Why Tesla's share price is up 500%
The primary factor pushing Tesla higher is its revolutionary product and its innovative leader. As Foolish auto guru John Rosevear noted in our discussion of CEO Elon Musk in December, Tesla is the only major car brand to be successfully introduced over the past 50 years. The United States' major carmakers have plotted for years the varying ways they could bring a purely electric vehicle to market, but none have achieved success on such a scale as Tesla and its Model S, which has nearly triple the driving range of some of its peers.
Tesla's success is quite evident via its order history, which has exceeded the company's expectations in each of the past three quarters, resulting in adjusted profits in 2013 for the first time in Tesla's history. In other words, the viability of Tesla's operations has been demonstrated and is no longer in question, allowing investors to instead focus on what the ceiling for Tesla's product could be.
Now let's look at some of the reasons I've decided to add to my short position in Tesla.
Tesla: 5 things I hate about you
There are a number of factors that have me believing Tesla is grossly overpriced. But rather than ramble on, I've narrowed my dislike of Tesla into five separate components.
1. Production capacity relative to value
Perhaps nothing turns me off to Tesla more than the fact that it's valued at $24 billion despite having produced fewer than 28,000 total EVs (assuming 6,700 deliveries in the fourth quarter) since its inception in 2003. By comparison, Toyota Motor (TM 1.52%) is capable of producing that amount in just over one day! Yet if you compare the valuation on these two companies, you'll see Tesla is worth about one-eighth the value of Toyota, the world's most valuable auto manufacturer. That certainly doesn't make sense to me.
Tesla has a number of ongoing production expansion initiatives that could bring total unit capacity to 40,000 by the end of 2014. While that's an improvement, it's still just a spec on the radar when compared to Toyota and General Motors, which are fully capable of 9 million-10 million units of production annually. What this equates to is a production value per car of about $1 million for a Tesla Model S, compared to an average value per vehicle of $5,000-$20,000 for the major worldwide automakers.
Now, understand that I'm not oblivious to the fact that the Model S is a revolutionary step up in EV quality, or that it won Motor Trend's car of the year award in 2013, but a premium that's at least 50 times higher than Toyota just doesn't make any sense.
2. A lack of EV-based infrastructure
The pace at which EV charging stations are popping up across the U.S. is improving, but the infrastructure is in no way as encompassing as the 500% rise in Tesla's share price would make it appear.
According to U.S. Census Bureau figures from the beginning of the year, there are 121,446 total gas stations in the U.S. deriving $249 billion in annual sales and employing close to 927,000 people. This figure isn't too surprising as fossil-fuel-powered vehicles dominate our roads.
Source: Tesla Motors.
Looking at EVs, we have some 20,100 charging parking stalls located across the United States as of October. However, these are merely stalls to charge your vehicle and don't allow you to pull in, "fuel up" per se, and leave. Charging your EV can require, according to Tesla's interactive app, anywhere from nine-and-a-half hours to fully charge in a 240-volt outlet to 52 hours for a full charge in a standard 120-volt outlet in order to get up to 300 miles out of the vehicle!
The solution to that is Tesla's Supercharger stations, which can quickly recharge a battery up to 50% of capacity within 20 minutes. This is, without question, the closest direct comparison to the gas stations we have now. Tesla notes on its website that it currently has 74 of these supercharging stations in service in the U.S.
Now, you do the math: 121,446 versus 74! Maybe now it's easier to understand why I feel a current lack of infrastructure should be a big impediment to Tesla's current valuation.
3. No GAAP profits
I don't blame this one bit on Tesla, but Wall Street and investors got into a nasty habit years ago of calculating profits and losses with the intent of excluding one-time costs and benefits. As it relates to the bottom line, though, these costs and benefits can be crucial in our understanding of a company.
As I stated above, Tesla has indeed turned profitable on a non-GAAP, or adjusted, basis over the past year as auto sale prices have improved and higher-margin cars with 85-kWh-battery packs, which have better driving range, were sold. But this non-GAAP profit only tells half the story.
For one, we have to factor in Tesla's highly coveted zero-emission-vehicle credits, which afforded it roughly $122 million in total revenue through its first three quarters of fiscal 2013 -- that's nearly 9% of Tesla's total revenue in 2013. In 2014 and beyond, these credits will be nonexistent. Once you factor back in things such as lease accounting, stock-based compensation, and non-cash interest expensing, Tesla actually produced a GAAP loss of $0.32 per share in the third quarter and has lost $57.8 million through the end of the third quarter in 2013. Even removing these factors and focusing strictly on automotive sales and then removing costs of production, R&D, and selling, general, and administrative expenses, you'll see that Tesla is still losing money.
In other words, let's not kid ourselves that Tesla is a profitable powerhouse just yet.
4. Its cars are still too exclusionary
Even as a short-seller, I'd be lying through my teeth if I didn't note that Tesla's Model S is a genuinely beautiful car. I remember seeing it for the first time and thinking BMW had done something truly amazing with its 7-series only to discover it was a Model S. But looks can also be deceiving.
Source: Pestoverde, Flickr.
With that revolutionary car comes a revolutionary price tag of $70,000-$100,000, effectively pricing the majority of the population out of owning a Model S. Furthermore, because the vehicle is so new, and there is no used EV market for comparative purposes, you can't lease a Model S, either. Plainly put, you can either afford a Model S, or you can't.
Even for those who are able to afford the Model S, there's still a question of charging viability. If you live in a swank downtown condo, there's a possibility that you're only choice is to park out on the street, which is fine for any fossil-fuel-powered vehicle, but it doesn't work when you have an EV that demands a plug for charging purposes.
Tesla's vehicles are clearly unique, but they're still far too exclusionary to become a mainstream item on our roadways.
5. Poor history of meeting deadlines
This last factor I've touched on a number of times previously -- and it's somewhat negated by having an innovator and risk-taker like Elon Musk as your CEO. Namely, Tesla has had a really hard time meeting its production and development timelines.
I probably already know what you're thinking: "The market is forward-looking and doesn't care what Tesla's done in the past. Look at the fourth quarter, when Tesla dramatically beat its production guidance!" While I'll admit recent Model S production is hitting the mark, it hasn't always been that way for Tesla. In fact, the debut of the Model S was delayed a number of times, and it isn't the only casualty.
Last year, Tesla announced it would be delaying the debut of the Model X SUV a full year until late 2014 from an expected commercial production date of late 2013. The inability to stay on course is a point that's frustrated me with Tesla in the past, and it's one that current shareholders seem largely OK with ignoring. Tell me, what happens when the considerably cheaper Model E, which is expected to debut in 2017, gets pushed out a year or two like all of its preceding models? My guess is some very unhappy shareholders.
