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On the front, I'm short Tesla (TSLA). This is a hedged short, a bear put spread (200/180, expires in March 2020, in the interest of full disclosure). But it remains a relatively small part of my portfolio, despite the fact that I now consider TSLA as one of the top short-term market ideas.
Honestly, there has been a big stumbling block in my success on a short film of TSLA (via options or a live exchange): the confirmation bias. Tesla has long been a title in which, from the point of view of the foreigner that I kept until the end of last year, the bears seem to have done more research on society and better understand the financial data, in particular. But there are reasons that go beyond the relative strength of both cases – and given the debate around TSLA on both sides, it is dangerously easy to end up with a tunnel vision of both sides. other trade.
Nowadays, where our consumption of information is more and more defined by pre-existing preferences, the confirmation bias is hiding everywhere. And for the moment, this represents a significant danger for the short films of TSLA – myself included. There are a lot of victory laps going on, and a lot of profits are counted. But there is also a growing feeling, at least from my point of view, that bears are losing their point of view – and, perhaps ironically, acting a bit like the bulls they are so quick to criticize.
Bulls vs. Bear
The stereotype of the short film TSLA that the bull was "good, did you drive the car?" It's not quite right – but there is some truth to it. Tesla short films, especially those interested in the so-called "$ TSLAQ" community on Twitter, explore questions about Q, run drones on storage lots, and search legal repositories. Tesla is relying on the capabilities of CEO Elon Musk, citing long-term projections for the growth of electric vehicles and assigning value to nascent business areas such as Autonomy and the Solar Roof. You're here. It certainly seems to an outside observer that TSLA's short films do a lot more job.
However, it is important to remember that this is not quite a fair fight. For any growth stock – and even below $ 200, TSLA remains undeniably a growth stock – a short-term value always will have to do more work. A long is not going to find an intriguing detail in the note 14 of a 10-K – because the details of the long case are in the investor's presentation or in the teleconference.
More generally, long arguments in favor of a growth value, almost always, at least in a certain way, boils down to "management is fair". And – as is the case with TSLA – this is not necessarily so important exactly How right. If the addressable market grows and the business occupies a growing share of the market, the operational leverage usually does the rest, even in the tough sector of the auto industry.
A long business in a growth stock therefore requires belief. In the case of Tesla, this means that we believe in Musk and that the company's products (cars initially, then alternative energy options from there) can generate a constant, growing and long-term demand. This belief does not justify completely ignoring fundamentals, or choosing random price goals that always end in at least two zeros. But a long TSLA – regardless of its quality or level of investor – can not provide proof of its case in the same way that a short TSLA can do. It's just the nature of a long case compared to a short case in general, and especially for growth stocks, as can anyone who has had a short action or (in my case) a short argument.
Add to this the fact that negativity usually seems more cautious. The bearish analysis always seems more sober (I'm sure that there is an evolutionary reason for this). As Matt Levine, always excellent, wrote it today to Bloomberg (on a completely different subject), "If you identify a bubble and it hangs, you look smart, if you identify a bubble and it continues to rise, everyone forgets, if you lead a cheerleader for an asset and that hangs, you look silly. "
Even George Costanza understood that looking bored was a good way to make people believe that you are serious. A little cry "fraud!" pointing to p. 87 of the 10-Qs will probably seem more believable than a long argument that the electric vehicle market is expected to quintuple by 2025 – especially for investors less familiar with the details of the story.
To be sure, there are some TSLA bulls that have not done the job. But there are some who have – and continue to do so. The bull business was neither stupid nor lazy – and there is still a version of a bull business that is not there. Model 3 was the world's best-selling electric vehicle last year. The struggles in Europe have recently attracted attention, but the Model 3 was the best-selling car in Switzerland in March. The adoption of EV will only grow. Again, a common equity growth paradigm is the growth of market share and addressable market – which is perfectly in line with TSLA, at least in theory.
Clearly, the chances of Tesla's ability to meet this paradigm have been considerably weakened in recent weeks, largely accounting for the sudden drop in the stock. And the reason I put on my trade was because I felt that the odds were much, much lower than the market price had been set at the time. But this does not mean that Tesla has had, or has no opportunity to develop, to generate consistent profits or justify its valuation. This does not mean that TSLA shareholders (past or present) or bullish analysts were idiots or conspirators. There was a bull business here – and, to be honest, there is always, although I do not agree with it.
After all, honestly, did you drive the car, brother? In truth, I did not do it (even though I climbed into a few). But his supporters are legion – far beyond those whose critics "I love the car, but the bumper is detached and then hit by my girlfriend" seem to be doing the trick of Twitter. Tesla can make really wonderful cars, when she does not make mistakes with spaces between doors or paint jobs. Tesla remains an attractive brand for many consumers who are not part of the TSLA minutiae. Indeed, despite the negative reviews circulating around TSLAQ, most buyers of some 600,000 cars delivered by Tesla are quite satisfied: the brand still has the greatest satisfaction from its owners in February 2019.
The story that is built around TSLA seems to be that anyone who was optimistic was naive, stupid, ignorant or a combination of the three. It's wrong – and it's unfair. There was a bull business here – and even if it was reduced, there are always some. These are really good cars. The electric vehicle market will develop. The idea that the competition will "expel Tesla from the water" seems to me too dismissive of the satisfaction of most Tesla customers (and not just "fanboys"). The broader plan of integrating automobiles and energy in the broad sense was intriguing. Market opportunities were and are still huge.
This is not to say that TSLA is a purchase. Once again, my short position remains open and I have no interest in closing it, even with a good profit for the moment. The reasons for concern are not lacking. The Tesla production ramp seems to have sacrificed quality, as even noted Consumer Reports. This has probably hit the mark, which harms the Bull deal. There are obvious financial concerns in terms of balance sheet and results. The management of Musk potentially becomes the biggest risk for the company (more on that later).
But more generally, the short films TSLAQ and Tesla seem to behave as if there had never been a bullish case. There are accusations that Tesla manufactures mainly or only cars of an unacceptable quality – despite criticism from the owners. These perceptions generate a series of increasingly inaccurate and unsustainable claims from Tesla shorts. The irony is that one of the most intriguing arguments of TSLAQ has long been to "look at who is on the other side of the market". In recent times, I wonder more and more who is on my side.
Elon and Enron
More and more, Shorts calls Tesla "a fraud". Comparisons with Enron and even Theranos ("Teslanos") abound. (We will assume that these references are based on Enron's popular narrative as intentional fraud, to what extent the company was actually a planned scam that remains to be debated.)
To be clear, qualifying Tesla as "fraud" seems quite different from claiming that Musk committed securities fraud during the "secure financing" debacle (in its settlement with the SEC, the CEO did not neither admitted nor denied these accusations). This is an accusation that the figures reported by Tesla are not credible.
The points of contention seem to cover areas such as underestimated guarantee reserve, cushioning by gameand other accounting practices. There were claims that the cash balance at the end of 2018 may have been falsified because interest income for the fourth quarter was exceptionally low. The claims are that not only is Tesla unprofitable at the moment, but one can not rely on these unprofitable figures – or perhaps just those on Q3, which have exploded.
Whether Tesla plays or not, some of the numbers are quite honestly superior to my salary class. Tesla's revelations are not really fine grain. As I wrote last year, Musk has focused on quarterly goals – including the hurry and instantly forgotten production goal of 5,000 / week to June 30 – in reason for an irrational and contradictory belief in the "short term" market. I would not be surprised if the company took favorable interpretations of accounting rules from time to time. It would not surprise me either – or probably most investors – if Tesla was not the only one to do so among publicly traded companies.
But calling Tesla "a fraud" goes well beyond these possibilities. And very honestly, it makes no sense. Despite all the hype about "secured financing," I thought the most interesting aspect of Musk's comment – and the most damaging for the TSLA case – was:
Honestly, I do not know what was in Musk's head when he sent the famous tweet "secured financing". Maybe it was part of a malicious plan to drive up the stock. Maybe he just got frustrated. Maybe he really thought he had an agreement with the Saudis. But it was definitely a terrible and poorly designed plan – and yet, its reach, in my opinion, is nothing compared to the tweet above.
This tweet – promising "no forced sale" – literally shows zero understanding of public and private markets. This shows nothing more than the sheer laziness of Musk able to envision the sphere in which his company operated more than 50 billion dollars. Tesla went into the private sector at the end of 2018 or early 2019 for $ 420 per share. There was no universe – no possibility – of a private Tesla with small shareholders, non-accredited retailers. A simple search on Google would have proved that: The rules of the SEC are pretty clear.
Musk's attitude towards short sellers is also based on a complete failure to understand the financial markets. This and his inability to understand basic financial concepts dispel any argument that he is "in charge" of financial information in any way. There is no evidence – no, no – that Musk has the knowledge to aggressively inflate, alter, or falsify Tesla's operational results. In fact, the evidence we have repeatedly suggests that he does not even understand how the financial markets work. As several people have recently pointed out, buyers of the recent increase in convertible debt have hedged their bond purchases by selling TSLA shares in the open – which means that Musk happily raises capital from investors. same market players that he regularly demonized.
Musk may not even be a hypocrite. His comment suggests that it is more likely that he does not even understand the contradiction. Musk is not even an engineer. He is not the founder of Tesla either. But is he so well versed in the accounting minutia that he cooks the books at Tesla? Come on. He does not seem to have the financial literacy to be CEO of a public company; it's actually an important aspect of the bear business (my case, anyway).
If Musk does not run Tesla's finance department in specific terms on how to "manage" the results, shall we say, who is? To stretch the metaphor of Enron, who is Andy Fastow to Musk's talent? The only answer would be Deepak Ahuja, CFO of the company from 2008 to 2015, then from 2017 to February this year. At the very least, if Tesla played with his finances, Ahuja should know at least something.
Thus, to qualify Tesla as "fraud" or to allege significant accounting irregularities, an investor must believe that Ahuja most likely planned these irregularities or, at least, was aware of them. He stole the numbers from the third quarter … then retired on February 1, leaving the reins to a 34-year-old man with no real experience outside the company.
Is this what officials do with a multi-billion dollar fraud? To withdraw? Two times? And then leave their work in the hands of someone with zero CFO experience? Meanwhile, if Ahuja (or Musk, by the way) was such a financial scholar and skilfully examined the financial statements to hide a bankrupt company, why did not he lead a capital increase? over $ 350 last year? In this scenario, the CFO should be aware that the financial data has been falsified to a certain extent and that the fraud could therefore be reduced at any time. Why did this increase only happen this month, at $ 243, more than three months after she left for the second time?
Allegations of "fraud" look like conspiracy theory, quite simply. They rely on the same erroneous principle as so many conspiracy theories: the culprits are so brilliant that they masterfully execute complex, multi-year, multi-faceted plans, while being so stupid that they leave evidence to the eye. Those who allege fraud attribute to malice what is explained more than adequately by incompetence – especially given the frequency with which this company has demonstrated this incompetence, especially in recent months.
# CRCL, or why Tesla goes bankrupt in six months, and this time we think it seriously
For unfortunate readers who do not spend hours per week reading unusual comments on a single action, #CRCL was – and still is – a hashtag used by Twitter by the bears. It means "can not reunite, can not leave", abbreviated the theory that an undisclosed SEC investigation prevented Tesla from raising capital.
#CRCL is often associated with fraudulent activity allegations, which have likely been the subject of a hypothetical investigation. And – at times – since Tesla did not have the money claimed and would inevitably burn what was left, bankruptcy would inevitably follow in weeks or months.
Then, of course, Tesla went for $ 2.7 billion. And while some admitted that the theory was wrong, the answer was largely – and still is – rationalization. The increase was not big enough. That was another faux pas, given that Tesla could have raised funds last year (including a direct sale, assuming the information is true, to the Saudis who eventually bought shares on the Free market). Tesla only delays the inevitable.
These facts can all be true. But the fact remains that many bears have claimed for several quarters that Tesla was under investigation so serious that it could not file a registration statement to raise capital. These arguments were false, period. And this is a pretty important aspect of a small business on which to go wrong.
Indeed, the argument "Tesla goes bankrupt" has been relatively widespread, going back to forecasts that last year the company would not be able to raise the $ 920 million needed to repay its convertible debt in March. At some point, the breathless proclamations that the bankruptcy is about to go out must stop. There is no substantial evidence that Tesla is really a "fraud" or something like Enron or Theranos.
And is there any doubt that if things went wrong, Tesla could not raise more capital? Or maybe find a buyer to assume his current debt of about $ 12 billion plus some value for equity? I'm not saying that a takeover is likely – or that Apple (AAPL) is about to be – but this is not a possibility that can be ruled out, especially with a man like Larry Ellison, apparently still in the corner of Elon.
Obviously, TSLA shares fall precipitously in one or the other scenario. But the case where the TSLA stock price is at zero generally seems to start from the seemingly erroneous assumption that the numbers are fraudulent, and over the past few quarters she has added to the manifestly mistaken belief that Tesla could not raise capital. This is not a solid case.
The Tesla brand still has value (for now) and its sales figure is still $ 22 billion. Tesla's cost of capital for new convertibles was approximately 8% (including hedges). The existing 2025 are trading at 9% for the YTM. Credit Default Spreads Increases Anyone who claims that Tesla is bankrupt in the next 12 months is an exception and is betting not only against Tesla bulls, but also on a bond market where short positions are often considered barometer of the risk of default. . And anyone arguing for bankruptcy has to argue a much better argument than what I've seen so far. At the very least, this case should include some recognition that many equally dire predictions have not been unsuccessful.
The "real" case for TSLA
To be clear, none of this means that the Tesla or TSLAQ bears are lying, or are funded by Big Oil, trying to stop green energy, or any of the other ridiculous charges we've made. In fact, as pointed out a tweet this week, there is a an impressive amount and scope of expertise and experience within this community. And TSLAQ appeared, well in advance, that many of the key issues are reflected in seller-side analysis reports. Why is Tesla's capex in free fall? Is the demand for S and X models crumbling? Why are so many cadres gone – and who, on the contrary, stays beyond Musk?
All of these questions are valid and the community has broadened my knowledge of the stock and provided the backbone for most of my thesis. But this thesis, at the risk of seeming arrogant, is a little simpler – and at least to me, more reasonable. I would like to note that Tesla still has a market capitalization of about $ 37 billion at the time of writing this article and a business value close to $ 50 billion.
According to any valuation measure, TSLA is still trading at a huge premium compared to other automakers. As such, to support everything close to these ratings, Tesla must be the best automaker in history. It has to generate more profitability per car (one of the reasons the gross margin debates are so important for today's case) than its rivals and show growth that dramatically outperforms all other automakers in the world. world. Even the auxiliary efforts in solar energy depend on the success of the auto industry, as Musk himself wrote almost three years ago.
Nothing that Musk has done in recent years suggests that a company he directs can achieve this goal. (You could call it a version of the "Founder's Dilemma", if Musk was actually the founder.) All in recent quarters – funding secured, closing / non-closing service centers, Model Y's disappointing and disordered launch, After the fall in investment, the decision not to raise capital last year, the ridiculous claims that a Tesla car will be worth $ 250,000 in three years – only reinforces this skepticism. Quite frankly, this company is running. And his again worth about $ 50 billion at the moment. I do not think that combination will hold.
This does not mean, however, that Tesla is a fraud. This does not mean that Tesla is doomed to reach zero. In my opinion, the biggest risk for the short thesis is that the company gets some sort of adult management, whether through a new hiring (goodness, this business needs to do it). a COO) or through a takeover. Bulls would say that Musk's ego would never allow such a thing – and / or would prevent an experienced leader of the auto sector from taking this type of post – and that's probably true, one of the reasons why I'm still small. But this is not a business doomed, or honestly even close to it – at least not yet.
TSLAQ highlights in many ways the promise of the Internet and social media: The grouping of disparate individuals with a common interest, who all benefit from the exchange of ideas. But especially lately, it also highlights the dangers of online speech. External ideas are ignored or rejected. And there has been a noticeable increase in the seriousness of Tesla's situation and the speed with which TSLA will disappear. Conspiracy theories are spreading about Musk's efforts to bring the SEC into a "suicide by the cop" or the same regulatory agency allowing Tesla to still exist a few quarters only to run a pre-bankruptcy. -emballée.
Ironically, the discussion resembles the reflection of bulls. Tesla Long has his own conspiracy theories about Big Oil and the media is paying Twitter users, reporters and presumably people like me to "demolish" the actions of TSLA. And only last year, in a different market for TSLA, they also enthusiastically created ever-rounded price targets and have undeniably accepted any information that could support it.
This is a dangerous way of investing. Investors can not be emotionally attached to a position – and this doubles for a short position. And anyone who has short-circuited must know, or should remember, that it is usually a counter-current trade. When the story turns in your favor may be precisely the most dangerous point. The story has very clearly turned.
In a few months, in the eyes of many, Tesla seems to have gone from a company poised to revolutionize the global energy sector to a company doomed to failure because no one will buy never again any of his products. The truth is probably somewhere in between, as is usually the case. This in turn means that the way forward for Tesla shorts might not be as smooth as what it has been, or that they believe that will be the case.
Disclosure: I am / we are TSLA short. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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