The Perils of Shorting: A Real Life Example

Hi Brendan,

The reason for the specific questions is that you have described Tesla as loss-making in a few threads. Now, you are admitting that you don't know what the market expects in terms of current profitability. This is not particularly impressive analysis!

Hi Brendan,

When a company has a great product and a bucketload of customers, it is unwise to dismiss its prospects purely on the basis of profitability or lack thereof today.

Were you saying the same thing about Facebook?

Take Uber as an example; you and I agree that we really like the product. They have a truckload of users. They have a truckload of data. We appear to be at an inflection point in terms of electric vehicles, autonomous vehicles, vehicle sharing, etc. Most experts predict that it a relatively short period of time, very few if any of us will own cars and they’ll be autonomous. The market is perhaps simply pricing in a view that Uber (or Tesla) could be the winner.

You know this, but the share price is simply Mr Market’s view of the present value of the company’s discounted future cashflows. What has profitability today got to do with that? Banks make profits, so do oil companies; but I wouldn’t buy them with your money!

“But they don’t make any money” isn’t sufficient in terms of an argument.

Gordon

elacsaplau said:

Hi Brendan,

The reason for the specific questions is that you have described Tesla as loss-making in a few threads. Now, you are admitting that you don't know what the market expects in terms of current profitability. This is not particularly impressive analysis!

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They are loss making. Making a quarterly profit does not make you profitable. I bet the pattern will repeat last year. Two profitable quarters at the end of 2018 and then big loss in Q1 2019. I haven't looked at any accounts in detail but the company themselves are guiding down Q1 and Q2 next year. Even the sales figures in Q3 that got everyone excited didn't translate to a corresponding jump in revenue. Tax credits for their vehicles in the US are ending next year so lets see at the end of 2020 how demand stands up and even if it does, whether they can meet this surge in demand that everyone seems to be expecting.

Comparing Brendan's short position of that he has already said he is willing to lose with professional hedge funds who are constantly shorting and rebalancing is ridiculous. If people are buying shares because they expect Tesla to be the next Google, then I don't see anything wrong with Brendan deciding to take the opposite view. He is not going to get burnt on margin calls so good luck to him. If it goes against him, he will have forgotten about it after a couple of pints and will be a good story at the next AAM Christmas party.

Gordon Gekko said:

the share price is simply Mr Market’s view of the present value of the company’s discounted future cashflows

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Hi Gordon

As I have pointed out before, the share price of the boring companies is Mr Market's view of the present value.

But Tesla's share price is driven by mania.

And I have pointed out that the current profitability or lack of it is not very relevant in Tesla's case.

Uber themselves have said that they might never make a profit.

Brendan

Sunny said:

If it goes against him, he will have forgotten about it after a couple of pints and will be a good story at the next AAM Christmas party.

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If it goes in my favour, it will be an even better story.

I must remember to invite Colm this year.

Brendan

Brendan Burgess said:

And I have pointed out that the current profitability or lack of it is not very relevant in Tesla's case.

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Brendan,

This is not consistent with previous posts - where you consistently said, incorrectly, that it was loss-making. You really have not presented any figures to justify your position.

elacsaplau said:

This is not consistent with previous posts - where you consistently said, incorrectly, that it was loss-making. You really have not presented any figures to justify your position.

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Have I missed something?? When did Tesla stop being loss making?? Surely, we are not claiming that a quarterly profit means a profitable business now???

Very interesting discussion! Credit to @Colm Fagan for his discussions.

Aswath Damodaran is a Valuation expert. For those looking for a comprehensive valuation he blogs here


On Tesla (from last June) he notes:

“I also listed possible, perhaps even plausible, scenarios where Tesla's value per share could be higher than $400/share, but argued that it would require the equivalent of a royal flush for the company to get there, a combination of a ten-fold increase in revenues, an operating margin of 12% and reinvesting more like a technology than an automotive company. Since the stock was trading at close $360 at the time of the valuation, I concluded that it was significantly over valued.”

That said, he is also a shareholder!

BB is right, the stock is affected by sentiment more than fundamentals. The volatility around earnings, Musks tweets and production figures is excessive. It is affected by mania. That said, where it ends up is another question!

Sunny said:

Tax credits for their vehicles in the US are ending next year so lets see at the end of 2020 how demand stands up and even if it does, whether they can meet this surge in demand that everyone seems to be expecting.

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Tax credits ended 31 December 2019.

As James Kirk and I have said in recent posts and Andrew said previously, there is a huge absence in numbers in Brendan's posts. [Sorry to personalise this Brendan - it's simply intended in the spirit of debate, etc.]

It seems to me that Brendan's line is that Tesla is overvalued because the price is too high and variations thereof. It may very well be true that it's overvalued - I simply don't know and haven't done any serious research into it.

Yesterday, I put into google: "Tesla earnings estimates" and the first link to appear was this -


I am making no claims that this is a particularly good link. Nonetheless, we have to start somewhere. Anyway, this link provides the consensus earnings estimates (EPS forecasts) for the years ending 2020, 2021 and 2022 from some analysts.

If the consensus estimates are broadly correct, then you can see how the current price is justifiable and that when Tesla's price was circa $300, it wasn't crazily overpriced as has been suggested.

It follows that Brendan must feel that the earnings estimates are seriously wrong. All I would like to know is:

- why does Brendan believe this
- what earnings level does Brendan anticipate over the next few years

I genuinely would like to know!

[All that said - even if Brendan's financial argument is compelling, I'm really not sure if I'd personally be able to get on the shorting Tesla bandwagon. I am too concerned with climate change to hope for poor outcomes for a company which has done so much to raise the bar for EVs.]

elacsaplau said:

there is a huge absence in numbers in Brendan's posts.

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Hi elacs

You are not personalising it at all. I don't mind being asked to back up my arguments.

I have not crunched the numbers myself. But plenty of other people have.

I will repeat the point. The price here is not driven by numbers. It is driven by mania. And the maniacs think that everything will go right for Tesla and nothing will go wrong and the rest of the car industry won't develop their own cars. And therefore Tesla is worth more than General Motors and Ford combined. It's not. In the same way that AIB was not worth more than Deutsche Bank and a few other European banks combined.

elacsaplau said:

I am too concerned with climate change to hope for poor outcomes for a company which has done so much to raise the bar for EVs.

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I think that Tesla is a great car and that Elon Musk is a great guy. I do not hope for a poor outcome for his company. I just want to see the share price fall back to where it should be.

Brendan

Thanks Brendan,

I guess, like Thomas, I need to put my hand in the wound for myself and not rely on hearsay!!

Or, given the nature of the nature of Tesla's activities, to kick the tyres with my own boots!

A good balanced article in the Financial Times

Tesla's soaring price defies the bears

The sharp rally has left most Wall Street analysts struggling to justify their much lower share price forecasts — while giving the Tesla bulls new confidence to predict that the stock will move even higher.

...

In the middle of 2018, Pierre Ferragu, an analyst at New Street Research, came up with the Street’s most ambitious forecast at $530 a share. That price was topped for the first time this week. Mr Ferragu now argues that the company’s clear technology and product lead over other carmakers could justify a share price of as much as $2,000.

...

If Tesla’s more reliable financial and operational performance have put the business on a stronger footing, however, it cannot entirely explain a share price that has flown so far ahead. At close to $100bn, its market capitalisation is nearly double that of General Motors, a company with net income of $8bn last year and nearly 20 times the number of vehicle sales.

...

Fund manager Ark Invest predicted this week that the robotaxi business could lift Tesla’s shares to as much as $6,000. But with the prospect of fully autonomous vehicles receding further into the future, most analysts have remained wary of attributing any value to this hypothetical new market.

Brendan Burgess said:

And therefore Tesla is worth more than General Motors and Ford combined. It's not.

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What is Ford worth? It's sp is down about 50% over the last few years. It's revenue is stagnant for the last 10years as are the sales. While Ford has 160 billion of revenue it has 154 billion of debt. The debt is junk rated. Worst of all possibly is the dividend policy. At over $6 per share they pay out 110% of profits. They are borrowing to pay the dividend.
GM are a little better in that they only pay out 25% of profits on dividends. They have $147billion revenue they have debt of $105 billion. Both sales and revenue are both going in the wrong direction though. AND they are only there because the government bailed them out (like AIB) These two are hardly great reasons to base an investment decision to short Tesla on in my opinion.

Hi James

But they are making profits so they can pay dividends.

But your overall point that the car business is very volatile and goes through periods of severe losses is very valid.

Brendan

Yahoo Finance has a good summary of all the forecasts.




I am surprised that the highest is only up 20% from the current price, while the lowest is down about 90%.

Maybe I need to review my $200 close out target.

Brendan

"Maybe I need to review my $200 close out target. "

I think there are higher prices but it depends who they included in the 26. Before you do the above it might be a good idea to see who the analysts are. they include guys with massive short positions that have cost them millions over the last few years. You don't want to end up like them.

One name on the list for sure in Adam Jonas, a highly thought of Auto analyst from Morgan Stanley. I forget where his price is today ($350 maybe) but his range was from $10 to $600 so a very tight range...not. His job is counting cars manufactured, extrapolating, and working from there. Unfortunately his record is poor. In 2016 he predicted M3 2018 production of 5k. Actual was 146k (+2900%). He predicted 2019 total production of 247K. Actual 367K (+50%). He predicted 500k in 2025. He's likely 5 years wrong on that. He was also wrong on every other number he called eg. average car selling price, margin per car, model mix ect.

Just to balance that, even though they were right so far , the bulls at the other end have the robo taxi priced in. A self driving car is a huge step for most today so It will be a while before many people will get into a driver less taxi to my mind. Even though self driving cars are close, the infrastructure in many countries will need a huge investment. I have been in a ModelS on auto (for a few minutes) in rural Ireland. Its only then you realise how poor the road marking are.

PS. great result for SpaceX today.

I have shares in Tesla for the last few years that have done really well. but i'm going to put my money where my mouth is and buy a few more. I'm not a big time investor or anything and actually had decided to a couple of years ago to invest through a second pension rather than directly ( more tax efficient at my stage in life).
However, when I look at Tesla, and I do in-depth, everything points to a bright future. I'v been invested here long enough to know it's quite capable of dropping back below $400, especially after Q120 which has the potential to be loss making. My target is $1000/share and I'll be happy if it hits that in 4 years even thought i think it's possible in 2 but the market (and events) may have other ideas. Time will tell.

If you only view Tesla as a car company, you're only seeing part of the picture. I think most analysts don't consider the energy storage side and solar roofs, which could be huge in the future.

Long TSLA and also a Tesla owner.

Tesla jumps another 6% at the open......Brendan shall I get you a towel to mop the sweat from your brow*?

*I mean this in jest only.



I hope this turns out to be a very nice earner for those who invested early on.