Is Tesla a Short?

Is Tesla a Short?

May 25 2021

Investor Michael Burry made so much money betting against the housing market in the 2008 mortgage crisis that Hollywood cast Oscar-winning actor Christian Bale to play him in the movie version of the Big Short. Burry took aim at Tesla earlier this year, the high-flying electric and autonomous vehicle, solar and battery company run by Elon Musk. He recently reported a large short position in the stock as of March 31, 2021. Tesla’s stock has slumped from its high of $880 per share in January to around $600 today. Others have shorted Tesla in the past with disastrous results, as the stock is still up 600% since early 2020.

TSLA’s $565 billion valuation is higher than Toyota, Volkswagen, Daimler, General Motors and BMW combined. Moreover, Tesla’s much touted “profitability” in the first quarter of this year is partly because it was able to sell $518 million in regulatory credits that Tesla earns for its EV sales which it sells to other car companies to meet their vehicle emissions mandates. The $518 million in credits pushed Tesla’s $10.4 billion revenues just high enough for it to have $413 million in profits in the quarter.

Is Tesla worth $600 a share today? A well settled way to value a stock is that it should represent the present value of the expected future cash flows of the business, discounted at a rate that reflects the risks the company is taking. That means that Tesla’s $565 billion market capitalization should reflect a representation of all of the money Tesla will earn in profits in the future from its EVs and related energy generation, energy storage, autonomous vehicle tech, charging and other technologies.

The main Tesla bull case is that Detroit, Germany and Japan will continue to lag in the design and production of electric vehicles as the auto market makes the massive, and now fully expected, shift away from gas and diesel to EVs. So far, Tesla’s revenues have grown tenfold since 2014, from $3 billion annually to $31.5 billion in 2020, while sales at the other major car companies are flat to down during that same period. Each of the vehicles in the Tesla line (Models S, 3, X and Y) is #1 by far, in each of their market segments. These are all premium priced vehicles, but Tesla suggests a $25,000 Model 2 is in the works that will benefit from far cheaper battery costs within a couple of years. Tesla has two gigafactories operating (Fremont, CA and Shanghai, China), with two more well under way (Austin, Texas and Berlin, Germany). There are rumors of future locations such as India, Japan, Korea and the UK. Tesla has been able to build these massive purpose built gigafactories at lightning speed.

Elon Musk makes claims about the future that are part goal, part projection, which the market takes with a grain of salt. He says the company expects to grow its revenues by 50% each year from now to 2030 and be selling 20 million vehicles annually by 2030 (or about 33% of overall global vehicle sales of about 60 million). A Bloomberg writer examined these projections, “Assume vehicle deliveries expand more than 20x by 2030, each one sold for $50,000 at a net [profit] margin of 10%,” then Tesla would be earning $100 billion per year in 2030. The writer offered that if Tesla was earning $100 billion this year (2021), its stock price today would still be at a premium to the stock price earnings multiples (PE ratio) of its competitors.

Noted Tesla bull, Cathie Wood, whose ARK funds profited handsomely in Tesla’s 2020 runup, has targeted a $3,000 per share stock price for TSLA by 2025, over 5x higher than where it is right now. She projects that in four years, Tesla will be making 25% profit margin on selling 10 million cars (up from 600,000 now) that will cost on average only $36,000 (vs $50,000 now). This will mean $367 billion in EV revenue, which is 12 times higher than it is today. She also adds in $327 billion in “Autonomous Ride Hail” revenue from a market that does not currently exist.

Autonomous vehicles and ride hail is a big Musk goal/projection. There are plenty of critics, including the leader of Google’s self-driving vehicle company Waymo, who says that Tesla’s system based on cameras will not succeed. Nevertheless, earlier this year, Musk once again touted the near-term arrival of full self-driving based on Tesla’s ability to use the big data coming from its existing fleet of vehicles combined with super computers and artificial intelligence it is developing, that could convert any Tesla vehicle to full self-driving.

The 90% decline in EV battery costs over the past decade is the key reason EVs are now competitive with ICE vehicles. Historically, Tesla has either purchased or partnered with the leading battery makers CATL, Panasonic, and LG Chem for its batteries. Last fall, Tesla announced that it was rapidly developing a new set of battery design and manufacturing innovations that would cut the weight and cost of its batteries by close to 50% within two or three years. Imagine GM announcing a new V8 engine that is half the weight and cost of its current design? In addition, the world is rapidly moving toward an electrical grid powered by solar, wind and lithium-ion batteries and Tesla is already a leader in lithium-ion utility scale and residential battery storage systems. Another Musk goal/projection is that its standalone battery business may be as large as its vehicle business by 2030.

Does this mean Tesla deserves its lofty valuation? Nobody, including the man dubbed “a walking moonshot” can predict the future, but Musk has defied his critics in space, in batteries and on the road, and has left a long list of short sellers short of cash.

April 20 2021

For many people, the true value of owning an electric vehicle remains a mystery. So, this week we lay out a straight comparison between life with an EV and a comparable gas driven car.

August 16 2021

In Bloomberg’s quarterly ‘Where to invest $100k right now’ column, our Editor-in-Chief, Doug McKeige, was one of six experts invited to share their thoughts. Today we sneak you behind the Bloomberg paywall for his insights.

September 14 2022

In the second video of our series of conversations with Michael Sonnenfeldt, Michael and partner Ben Wolkon discuss their climate investment strategies and reveal some of the innovative companies they are backing.