Patience and equities – shorting story stocks like Tesla

Topic: How long is a long time being alone and wrong on the stock market?

Discussion: Just two months can be torture when you are the only one seeing and saying the emperor is naked, not to mention two years. Yet, you have to be prepared to wait as long as six years even if you’re right

Conclusion: Tesla is still a zero; and just to be clear, the wait has hardly even begun. Calling shorts “wrong” this early in the game based on the share price is just ignorant and short sighted.

Tip: Check out this post about Tesla too


Tesla’s only assets are its fans, but they will soon fade when competitors surface

I didn’t think Tesla was a zero when I started looking at the stock about three years ago. I just thought it was about 10x overvalued. I was aware from the beginning, however, that I’m often a bit more negatively inclined than most equity investors, and thus prepared for the stock just falling by 75% rather than 90%.

When the stock halved from around 280 to 140 in the second half of 2015 and beginning of 2016, I thought gravity had finally* caught up with Tesla’s share price and that it was due for another 50 per cent leg down to 70. Boy, was I wrong! From that temporary hickup the price almost tripled in a straight line, peaking on September 18, 2017 at 389.16 USD per share.

* “finally” – I should have known better than thinking I’d be proven right within 18 months from my first look at an epic short case like Tesla. To be fair, I didn’t really consider it an epic short back then, just a very expensive car manufacturer but one that just might be able to grow into its valuation over a very long time.


From just expensive to just nothing

Since then, the Tesla short story has become more and more epic fundamentally. Back in 2014-2015 I just thought it was an expensive but very cool and promising company, but now it’s turning more and more into a Theranos-like fraud with zero value. Every day there is new craziness regarding Tesla’s technology, production process, employee policy, senior executive exodus, broken promises, delayed product launches, dangerous software, CEO jokes, car crashes and client, supplier and analyst abuse, not to mention increasing losses and negative cash flow.

Over the last ten years, Tesla’s CEO has promised again and again that the company will be profitable next year or even next quarter, or that a certain product is already on its way or that the company won’t need new financing. Time and time again those promises have been broken.

Right now Tesla has about 10bn in debt and is burning an additional billion a quarter. Its clients have deposited many hundred million dollars in advance — for cars the company claims will put it in bankruptcy if it were to actually manufacture and deliver them. Even Tesla’s most ardent supporter, Goldman Sachs, says Tesla won’t make profits or become cash flow positive until years after when Tesla claims it will. Tesla has kept postponing the deadline for ramping production of the Model 3 to 5000 units a week, but not even an expensive move to round the clock production has lifted the pace more than halfway.

Four years ago, Tesla was just another promising but expensive glamor stock. Four years ago, Tesla hardly had any competition, and it had extremely satisfied Model S customers. Tesla was starting to look like Apple around the launch of the iPhone – expensive but not entirely impossible. Today Tesla’s a dead man walking. What’s most amazing with Tesla is that the stock (316 USD) is still close to its all time high (389 USD), and close to where it traded when I first laid eyes on the stock, despite the barrage of negative news over the last twelve months.


Patience takes more than just a few years

I’ve heard so many times in various investment situations that I’m wrong and just don’t get it, even though it’s only the share price and only for a few years that’s been going against me.

If I’ve learned one thing from my 20+ years (1994-2014) as a finance professional it’s patience. Twelve months is nothing when it comes to waiting for the market to price in fundamentals. Actually, four years isn’t a particularly long or reliable time period either, but rather a kind of average expected waiting time, give or take a few years.


Fingerprint was an unusually fast win, and yet those two months were pretty tough (social media has a tendency to shrink the time horizon)

Tesla reminds me of the Swedish company Fingerprint Cards that for a short period of time in the fall of 2015 was Europe’s most traded share.

Three years ago I thought FING looked expensive. However, given its rapid growth in sales and profits I also thought it was hard to time a share price peak. In any case, the third quarter earnings report showed a slowing S-curve that together with a cautious Q4 guidance pointed toward a share price peak around the turn of the year. I said as much on TV in September 2015, just two months before the subsequent all time high (136 SEK; now it’s trading at just 6 SEK per share).

Just to be clear, Fingerprint exhibited amazing growth in sales and profits, and it was the undisputed global leader in fingerprint technology. It was a great company, but with a ridiculous valuation and a crazy following. I just called out the valuation-fundamentals discrepancy, not in any way that the company itself was flawed. The semiconductor industry in general, and the mobile phone sub supplier industry in particular are fiercly competetitve and cyclical. Hence, not only was the valuation of actual profits many times too high, the profits per se were soon likely to fall rather than keep growing rapidly. And here we are, just three years later the stock price is down by 95-96% and sales and profits are much lower than at the peak.


Fingerprint was a real company, unlike the Tesla of today

Fingerprint was a good company with plenty of cash, strong profits and very good cash flow, whereas Tesla is heavily laden with debt, broken promises, even more promises that are impossible to keep, and facing more competent and fierce competitors than Fingerprint ever faced. Tesla has experimented (taken shortcuts) with radically new production processes in an industry that has perfected its quality control policies over a century and now it seems to be about time to pay the piper.

I say “about”, because keep in mind that even if Fingerprint’s share price came back to Earth in just two-three years, there are no guarantees Tesla’s will. However, given Tesla’s fundamental problems of poor production, low quality, lawsuits, lagging technology in all areas (batteries, chargers, chassis, autopilot and so on) and its urgent need of new financing, I dare forecast a shorter time from highs to -90% than for Fingerprint.

So, before the end of November 2019, I think Tesla will trade below 39 dollars per share. You think that’s too long to wait? Then maybe you shouldn’t be involved in equities :D

The November 2019 forecast discounts the glacial pace of stock markets taking fundamentals into account. Secretely I think the process will over a little faster, but then again, I’m often hoping for too much too fast on the downside. Fingerprint reached its ATH just months after taking of in earnest; let’s call it 9 months. From there it took another 9 months or so to really break the story and commence the 18-month slide to oblivion. Tesla took off in the first quarter of 2013 and didn’t reach its highs until Q2-Q3 2017, so maybe it will take many years to approach restructuring round zero. On the other hand, Tesla is in desperate need of refinancing just to stay in business the coming 6-12 months.


Summary – Buy or sell, how patient and how independent are you?

Do you dare to be contrarian? (Just because Tesla is the most heavily shorted stock on the planet doesn’t mean going short isn’t contrarian)

Alternatively, do you dare go long a company without anything going for it other than hundreds of thousands of bigger fools that will keep refinancing a sure loser no matter what?

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9 Comments

  1. Zero? Really? I think there’s a definite chance of Tesla stock still having positive valuation when the company ends. Tesla does have one asset: fame. For a company like GMC, $1E10 is almost petty cash. What would it be worth to them to market their hybrid and electric vehicles as Tesla models?

    There’s another way Tesla’s demise may be at least delayed. US taxpayers have always, whether they like it or not, been remarkably generous with failed auto companies. Tesla can also appeal to the envirotard constituency, since many of them believe that electric automobiles are cleaner than petrol ones.

    Maybe the US government will pay GMC to buy Tesla. That would be a win-win solution, so far as it concerns anyone our regime cares about.

    • Don’t forget 10 bn in debt and rising. I’m talking about equity value, not enterprise value or possible sale of IP. 10bn+ USD for is still apretty high price tag for Tesla’s “brand”, but would mean ZERO for the shares.

  2. I didn’t realize the CEO had been making and breaking promises for years. I was thinking the next 2 quarters were the turning point. He is promising cash flow vs. analysts predicting another $3 billion cash raise. I’m probably wrong.

    I stay away from “story” stocks. I don’t understand the value of a famous CEO. He doesn’t interest me as either an entertainer or guru. I’d rather have a dish soap company that pays a dividend. Just a personal preference.

    I notice the Jan ’20 $50 puts sell for about $4. Large open interest.

    Just to illustrate how out of my element I am, I didn’t like apple when they were selling the iPod. Nor when they came out with the iPhone. I just can’t understand how my fellow humans can pay high prices for consumer goods, simply because it’s popular or the CEO is a celebrity. Perhaps understanding my cognitive weakness is half the battle.

    • “No one ever went broke underestimating the intelligence of the American public” – H. L. Mencken

    • Today a few weeks later… The stock price holds above 300, despite pretty weird things from Musk. It’s a magic stock. A bit like Theranos, Enron… and XIV

  3. You have decades of experience in the world of finance and earned lots of wealth finding market imbalances, but I really hope you’re wrong on this one. I don’t own any shares or derivatives so I have no financial incentive either way, but I’d like to see a future with Tesla along side many other brands of electric vehicles.

    • I would too. It’s just that I can’t see the numbers adding up that way.

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