Tesla: The Key Reason The Shorts Are Getting Run Over

In only eight weeks, Tesla (TSLA) has moved from about $250 to, or near, all-time closing highs, currently at $379. A 20% short interest ratio (ETrade data, plus data from link) could well explain this move, which is itself a continuation from the recent multi-year lows below $200. The initial catalyst, an upside surprise in Q3 results, can hardly explain the power of this move.

Before getting into my basic point that TSLA is improperly understood by the bears, I’ll show its long-term chart. Here, this move up does not look overdone. I think it likely points to fresh highs, especially when shown against the market and the resilient tech sector (where I believe TSLA largely belongs):

ChartData by YCharts

This stock has been a monster to the upside, but bears abound.

In an online article Monday, a Barron’s article mentions short covering as a reason TSLA has surged so much. However, it omits an online Barron’s article from the preceding Friday that I think is a more immediate driver of Monday’s big move up in the stock.

Here’s the Friday story in the next section, the title of which presents the reason I think the bulls got bolder Monday:

TSLA sees strong business conditions

The same author who wrote Monday’s piece also wrote Friday’s. It was titled Tesla Stock Is Highly Valued and Faces Execution Risk, Deutsche Bank Notes. Here’s a quote of what I think is the most important part, the opening:

Deutsche Bank analyst Emmanuel Rosner hosted brokerage client meetings with Tesla representatives recently. Things went well. Demand trends are “solid” and he believes the company is well positioned to deliver on key product milestones in coming months. Milestones such as rolling out the new Model Y sport-utility vehicle and beginning Chinese production of the Model 3 sedan. It all sounds like good news.

So far, it really sounds like a good news to me.

Yet the analyst is very bearish, estimating TSLA sells at 18X 2025 earnings. He asserts this is far too high for a car company. His price target: $290.

In the next sections, I provide several ways I think that TSLA is misunderstood by important parts of the investment community. These are all variations on a theme, but different.

First:

TSLA’s vehicle sales should not be compared to those of old-line car companies

TSLA is an electric vehicle company. It is a disruptor. Global EV sales are widely forecast to rise from current negligible levels to tens of millions of vehicles annually, growing at least until 2040. Companies that successfully lead a disruption often appear overvalued while they are young, but in retrospect if they succeed, turn out to have been seriously undervalued.

Even forgetting the differences between TSLA and GM (GM), within the vehicle space, TSLA has a clear path to ramping production 10-20X over the years while potentially maintaining a leadership position in EVs. If that does happen – no guarantees of course – then perhaps its proper P/E on 2025 profits could be 50X or higher rather than 18X or 12X as Mr. Rosner appears to suggest.

Moving on…

TSLA is a high-tech company with a grand plan to change automobile usage patterns

Between over-the-air software updates and information sent back from cars to accelerate TSLA’s self-driving plans, Elon Much – TSLA’s CEO and a software geek – has designed a high-tech system with an overarching vision that promises huge profits if successful. This vision includes the Robotaxis: self-driving vehicles that greatly aid the efficiency of the whole manufacturing system. Why build so many cars that mostly sit idle, depreciating as they do so?

No other “car company” has this sort of endgame designed into its road map.

Staying within the concept of TSLA as a vehicle company, this grand vision is thoroughly different from that of the incumbent car companies.

TSLA’s innovation goes well beyond software…

TSLA is an applied technology company

As I mentioned in Yesla!, written in October 2018, TSLA has various first-mover advantages that represent applications of inventiveness to EVs. In Yesla!, I article quoted from a May 2018 Motor Trend review, Tesla Model 3 Teardown: The Nitty Gritty Details. Note the highlighted part of this quote from that article:

Munro [the reviewer] is very impressed with the Tesla’s design, ride/handling, electrical and electronic architecture, and myriad innovations sprinkled throughout the Model 3.

While the review was critical of the body and chassis, it showed that TSLA has been innovating specifically for EVs, whereas whatever innovation may have been going at all the other car companies has been for their basic internal combustion engine, or ICE, designs.

EVs are different from ICE vehicles, and TSLA has been engineering for EVs for years.

Moving to TSLA’s single most core technology, batteries, even a TSLA bear believes it’s ahead of the competition.

As Barron’s reports Tuesday, Even a Tesla Skeptic Thinks Its Batteries Are Superior. The article describes:

… Tesla’s use of cylindrical cells, which offer more energy density than the prismatic cells used by competitors, who have mostly stayed with them because cylindrical cells can pose difficulties in assembly and thermal load management.

In other words, TSLA has a very important first-mover advantage here.

Who can say how much this alone is worth? I think this is very valuable and expect TSLA to keep innovating in its various uses of batteries.

The “other guys” are clearly playing catch-up in many ways. Meanwhile, they still have to innovate in their ICE businesses, which provide the (often shrinking) cash flows that allow them to try to compete in the EV business.

TSLA’s many advantages in applied technology are a very big asset, in my humble opinion.

Moving on, of course we all know that…

TSLA is much more than a vehicle company

This is the most basic disagreement that I have with Mr. Rosner’s valuation model for TSLA as reported by Barron’s.

TSLA’s major competitors are old companies that have achieved their goals of manufacturing large numbers of ICE vehicles.

But now their products are under attack from TSLA.

As an analogy, think of Apple (AAPL) disrupting RIMM – now BlackBerry (BB) – and doing the same to Nokia (NOK). Those stocks collapsed, while the iPhone led AAPL to undreamt-of heights. The incumbents just could not adapt, and so might be the case for TSLA’s vehicle competitors. Part of the reason for my analogy is that AAPL was more than just an innovator in smartphones. It was creating an ecosystem of touch screen products that strengthened loyalty to the iPhone (and to one another). Three years after the iPhone was announced, the iPad followed. Several years later, the Apple Watch was announced.

Having an ecosystem of related but differentiated products has helped AAPL keep customers loyal. it has also given AAPL more bang for the R&D buck by restricting its focus to these related products.

TSLA’s evolving goal is similar to that of AAPL. It is developing a continuum of products that rely on advanced battery technology to create and store energy.

Elon Musk has recently suggested that TSLA energy business could in aggregate be more important to its financial results, over time, than the vehicle business.

I am very interested in the economics of the Solarglass Roof. Sales potential globally exceed $50 B annually (and could be much greater than that), as I discussed in my most recent TSLA article, Tesla: Ready To Re-Enter The Fast Lane. There are lots of roofs built in new homes and buildings globally, as many more replaced. Why not with a roof that produces electricity and sends it downstairs to be stored when needed in a TSLA Powerwall? TSLA may have a major first-mover advantage here, too.

So: the appropriate way to think of TSLA is as a renewable energy company, with core expertise in batteries, vehicle design and software, and collection and storage of solar energy both from roofs and from utility-scale collection of renewable energy.

Its current products already extend beyond vehicles.

That leads to a broader AAPL analogy to consider…

What if TSLA’s best product is yet to come?

Steve Jobs, co-founder of AAPL and CEO from the late ’90s, was known for presentations with one unexpected add-on product that could wow the assembled faithful. Let’s think about TSLA not as the AAPL of today, but as the AAPL we knew as of Jan. 1, 2007. The stock had soared over the prior 10 years despite being caught up in the Tech Wreck. The revamped Mac line was gaining market share against PCs, the iPod line was a smash hit, iTunes was a major innovation, and Apple Stores were proving that a relatively small tech company could succeed in this niche.

Yet AAPL was just getting going.

What if TSLA is getting ready to introduce a renewable energy product that changes its game, markedly expanding its total available market? One of these days, will Elon Musk introduce a breakthrough “one more thing” as Steve Jobs used to do?

I expect that the TSLA we see today will, assuming a good amount of success, be a bigger, more interesting TSLA in 2025 than Mr. Rosner and the Street are projecting.

Risks

This is a risky and volatile stock.

My Dec. 3 TSLA article delineated several major risks, namely:

  • Investors marking speculative stocks down as they did after Y2K
  • The CEO
  • Various China-related potential issues
  • Weak uptake of EVs
  • TSLA-specific performance issues

Of course, there are many more risks to this stock. Please see TSLA’s regulatory filings such as the 10-K for a much more comprehensive and relevant discussion of them.

Conclusions – TSLA as a misunderstood disruptive force

In this era of high valuations such as those for Netflix (NFLX) and, not long ago, Amazon (AMZN) despite the absence of profits, as well as those of many SaaS names, I find it perplexing why TSLA has so many bears amongst the analysts. Usually they chase price performance.

Even when TSLA was looking weaker, in November 2017 I wrote Thinking Differently About Tesla (again, an AAPL theme), with the conclusion that neutrality was the truly logical point of view on the stock. I asserted that every negative could be countered by a positive and vice versa. TSLA was around $316 then, and indeed it went nowhere on balance for the next two years.

Now I suspect that too many investors are not assessing TSLA holistically as a platform technology. The stock has been an immense winner as TSLA has gone from zero sales to a projected $30 B next year, with massive growth to $46 B projected for 2022. In an era of high valuations for growth stocks, TSLA, with its change-the-world attitude and a robust pipeline and realistic plans to grow rapidly, looks attractive to yours truly below $400.

The bull-bear battle is therefore joined. Very different points of view make for good two-way markets. I think that the global economy is probably headed upward, and that if TSLA’s vehicle and other businesses are looking good now, as Mr. Rosner has reported the company as saying, then they will probably look better a year from now. So I’m staying long and not selling into this rally.

In conclusion, it looks like it’s probably time for the TSLA shorts to really break a sweat. Some rallies are no-correction killers, and the current one has those characteristics.

Seeking Alpha

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