Tesla Stock May Represent The Largest Single Bubble Ever

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Whitney Tilson’s email to investors discussing Tesla Inc (NASDAQ:TSLA) stock may represent the largest single bubble.

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Tesla Represents The Largest Single Bubble

1) I’ve never seen a bull-bear debate like the one over electric-car maker Tesla.

The bulls have been triumphant so far, as TSLA shares are now trading for more than $2,000… and the company’s market cap is approaching $400 billion. Will this continue?

For the bull case, watch this long (43-minute) conversation between Tesla Daily’s Rob Maurer and Mad Money’s Jim Cramer (hint: listen at 2x speed): Jim Cramer & Rob Maurer Discuss TSLA Stock, Elon Musk, Tesla’s Battery Day, and Tesla’s Advantages

For the bear case, here’s the latest from my friend Doug Kass of Seabreeze Partners, who thinks “Tesla stock may represent the largest single bubble – as measured by market capitalization of nearly $400 billion – in history”…

Trade Of The Week (And Investment Short) – Short Tesla ($2014)

    • I have assiduously avoided shorting Tesla for years.
    • No more…

Telsa’s shares have climbed from [roughly] $350/share on March 19, 2020 to over $2,000 today.

It can now be argued that Tesla’s shares represent not only a good short-term short but, at current prices, the stock may represent the largest single bubble – as measured by market capitalization of nearly $400 billion – in history.

Here are the major points to my short investment thesis:

    • Tesla has a shallow moat – the manufacturer has nothing that is proprietary in terms of electric car technology. Tesla’s competitors (in the U.S., Europe, and in China) have a century of experience consistently manufacturing and distributing high-quality automobiles which subsidized ongoing operating losses from their electric car endeavors.
    • Polestar, Audi, Volkswagen (VLKAF), and others have highly rated electric vehicle (“EV”) offerings that are now or will be shortly offered.
    • Adjusted for the sale of emission credits, Tesla has never been profitable in its 17 years of existence (despite having no competition and no need for advertising). In July, Tesla reported second quarter net income of $104 million, which included $428 million of pure profit emission credit sales, a revenue stream that will be drastically reduced later this year and which Tesla openly admits will disappear completely some time in 2021 (when other manufacturers have enough EVs of their own). Excluding that, Tesla lost $324 million and that’s before the accounting of a questionably low warranty reserve. The worrisome and accounting, recently pointed out by @WallStCynic, “depreciation and amortization was down (!) year over year despite a new factory coming on line. SG&A and research and development was also down year over year.” While sales are shrinking, the accounts receivable line is growing (remember this is a company that demands pre-payment before delivery.
    • Tesla, at best, undertakes aggressive accounting. There are multiple lawsuits regarding the purchase of Solar City (which arguably bailed out the finances of Elon Musk and his family).
    • Management turmoil at Tesla has intensified over the last one to two years.
    • Tesla’s quarterly sales have actually dropped since the end of 2018. The only reason Tesla’s sales are being maintained is because of massive price cutting – and this is BEFORE the onslaught of competition that is on Tesla’s door step.
    • Tesla’s second quarter revenues were buoyed by price cuts and sales into China (where EV competition is just beginning to start) while the rest of world sales were -30%. (For perspective General Motors (GM) sold over 710k units in China compared to only 30k for Tesla). Current sales are so weak that Tesla is aggressively advertising a price drop for the Model Y. The company’s market share in the competitive European EV market has fallen from about 30% to single digits.
    • The market is not static. Analysts and market participants fail to consider how much of Tesla’s share of the EV market will be taken by the new models introduced by nearly every auto manufacturer, who’s announced spending plans will dwarf Tesla’s anticipated outlays. From Mark Spiegel: “Noted competition will include the Audi Q4 e-tron and Q4 e-tron Sportback, BMW iX3 (in Europe & China), Mercedes EQB, Volvo XC40, Volkswagen ID.4 and Nissan Ariya, while less expensive and available now are the excellent all-electric Hyundai Kona and Kia Niro, extremely well reviewed small crossovers with an EPA range of 258 miles for the Hyundai and 238 miles for the Kia, at prices of under $30,000 inclusive of the $7500 U.S. tax credit. Meanwhile, the Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful new Polestar 2 and the premium version of Volkswagen’s ID.3, and next year from the BMW i4.”
    • The mere presence of all the competition will clearly lead to margin compression. As previously mentioned, Tesla is already cutting prices of its existing models.
    • Bullish analysts base their future stock price evaluations on unsupported assumptions of what share Tesla will take of the global automobile market. They further assume that the margins that existed over the last two years – a period in which Tesla has faced little or no competition, will be maintained in the future.
    • Tesla faces numerous lawsuits, including a May lawsuit accusing the company of selling units that were a fire hazard and a potentially significant and well publicized sudden acceleration class lawsuit delivered in July. Range claim issues have also recently arisen.
    • Tesla no longer has a stock split as a catalyst as the company already announced a 5-1 stock split for shareholders of record on August 21.

Bottom Line

I have assiduously avoided shorting Tesla over the years, in part because of the high short interest, which has subsequently contracted to more “reasonable” levels.

I have followed Tesla for over a decade and I could add materially to the bearish case that I have summarized this morning.

That position has now changed.

Faced with an onslaught of competition, Tesla’s market cap is now nearly 4x that of Ford (F), General Motors and Fiat Chrysler (FCAU) combined – despite selling only about 400k cars/year, compared to the “big three’s” sales of 17 million units.

I am adding Tesla to my Best Ideas List (short).

My view on the stock hasn’t changed since I last wrote about it in my July 23 e-mail:

I’m not pounding the table that Tesla’s stock is a great short here. On the fundamentals, the company has a big lead in multiple enormous emerging markets, making this a very open-ended situation. Plus, to their credit, CEO Elon Musk and his engineers have consistently achieved things I wouldn’t have thought possible. And, as for the stock, the cult around it is unlike anything I’ve ever seen.

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