The Perils of Shorting: A Real Life Example


Assuming that analysts have a clue is your number 1 mistake , analysts are statistically terrible at predicting how a stock will do .
 


My first 201 reg sighting - a Tesla. Is this a bull indicator or whatever the chartists call them?

I took this with my old Brownie so don’t be reporting me for use of mobile phone
 
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100 billion market cap /4000 profit per car(random back of the envelope guess) = 25 million cars need to be sold for my investment to double (or be paid back).

How many years will it take to sell 25 million cars in total?

100 billion * 6 p.c. wanted return / 4000 profit per car =1.5 million cars to be sold a year. How many years before Tesla are selling 1.5 million cars a year.
 
Folks
I have moved the battery discussion to a separate thread as this thread is about shorting.

Tesla's battery technology discussion

Ultimately they have to win against the big car companies that have a long history of producing very complicated products , producing a modern diesel car is still not easy. Therefore I still think that the likes of Toyota or Nissan will still be able to overtake Tesla in electric cars especially...
askaboutmoney.com

Brendan
 
Hi SPC

I am trying to follow your calculation.

I want a 6% return on my investment in shares.

The market cap of €100 bn, means that they have to make profits of €6b at some time in the future to justify that.

To make profits of €6bn, they must sell 1.5 million cars at €4,000 net profit each.

How many cars will they make in 2020 and what is the profit expectation?

Brendan
 
Yes. I'm trying to figure out something about what has to happen to justify the price. Or how bad/unreasonable the mania might be.


So to be selling 1.5 million cars a year they need to own 2% of global market.

https://focus2move.com/world-car-group-ranking/
The top ten car brands by volume each account for between 3 and 10 percent of global sales.

Using these assumptions, It seems, If you believe Tesla can own 2 or more percent of global market in a few years (and make 4k profit per car) price doesn't seem off the wall.
 
From wiki

Tesla delivered 367,500 cars in 2019, 50% more than in 2018 and more than triple the number sold in 2017. At the end of 2019, Tesla's global sales since 2012 totaled over 891,000 units
Click to expand...
 
Global EV sales totaled about 2.1 million for 2018, an increase of 64% compared to the total sold in 2017.
Click to expand...

So they have about 20p.c. of global ev market sales. If they keep market share and the ev percent of global market increases about 5 fold. They are then selling about 2 million cars a year.
 
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So if
-they can make 4k profit a car
-and ev sales grow from 2.5 to 10 percent of global cars sold
-and Tesla maintain their twenty percent of the ev market
i.e. Tesla grow annual numbers of cars sold 4-5 fold

Then
I can get a 6p.c. Return at current price.

My take: the brand is strong enough, and evs are strong enough to sell well beyond this volume in a few years. The key question is can Tesla grow to deliver profitably at this volume. And how many years would we have to wait.
 
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SPC100 said:
So they have about 20p.c. of global ev market sales. If they keep market share and the ev percent of global market increases about 5 fold. They are then selling about 2 million cars a year.
Click to expand...
SPC. good job on the research. Just to add a bit to your figures. The 20% market share for 2018 is very low because the M3 was just coming off the production lines. In 2019 the M3 alone have a 60% US EV market share. In the overall auto market Tesla had a US 2019 market share of 1.3% up for .75% at the end of 2018. When the M.Y starts delivery shortly that share will rise sharply.

As China is the biggest market for EV global sales and Tesla were only shipping MS & X in 2018 the % of Tesla sales would be low. I have no doubt that by the end of 2020 the China Tesla EV market share will well above the 20%.

Same goes for Europe. M3 sales are flying and with China producing their own cars Tesla will have more scope to supply the European market.

The 5 fold market increase in EV global market share is too low as well. from 2013 to 2016 the market grew x5. from 2016 to 2019 the market grew x4.7 .
 
Brendan Burgess said:
How many cars will they make in 2020 and what is the profit expectation?
Click to expand...

From the people I would trust online estimate is 550,000 for 2020 and 1.1m for 2021. Profits are a little more difficult because of G3 ramp, MY ramp and G4 construstion but for 2020 over $ 2billion. Next Wednesday might shed more light on that. Expectations for Q419 is a $400 mil profit.
 
It has been a torrid few months for my short position in Tesla. I sometimes ask myself if I have completely misjudged the company.

I’ve looked again at my analysis and the conclusion is the same. Putting it bluntly, Elon Musk is probably the most egregious example I’ve ever come across of a manager who promises the sun, moon and stars, but comes up short.

A few examples, taken from quarterly updates from January 2018, illustrate my point:

Jan 2018: “In 2018, we expect to begin generating positive quarterly operating income on a sustainable basis”. The company had negative operating income in four of the seven quarters since then. Shareholders suffered total losses of almost $2 billion in the following seven quarters.

Jan 2018: “There were initial concerns that sales of Model 3 would cannibalise Models S and X. The opposite is true.” Models S and X sales fell, almost a third, from 99,500 in 2018 to 66,750 in 2019. Margins on Models S and X are much higher than on Model 3.

Jan 2018: “thrilled to surprise everyone with the next generation Roadster”. Also unveiled the Semi (a truck) which “launched Tesla into a new product category”. Neither vehicle has yet seen the light of day. They are promised sometime in 2020., more than two years later. Don’t hold your breath.

April 2018: “Gross profit should grow much faster than operating expenses”. Gross profit fell in Q4 2018 and Q1 2019. In the most recent quarter (Q3 2019), gross profit was less than 80% of the corresponding figure twelve months earlier.

July 2018: “Expect to hit 10,000 Model 3 a week (130,000 a quarter) sometime next year.” The highest quarterly figure in 2019 was almost 30% shy of that expectation.

Jan 2019: “Expect to have positive GAAP profit in every quarter beyond Q1 2019”. Losses in Q1 and Q2 2019.

April 2019: “Enabling our customers to use the Tesla ride-hailing network fleet and generate income” This refers to the famous/infamous robotaxis, which supposedly will enable Tesla owners earn extra money by telling their cars to ferry partygoers while they sleep. Don’t worry about putting the kids into a car reeking of booze and cheap perfume the next morning. Musk claimed in a press conference the same month that Tesla would only earn sustainable profits after it had built a global network of fully self-driving robotaxis.

July 2019: “We believe our business has grown to the point of being self-funding” Just after tapping shareholders and bondholders for more than $2.5 billion.

July 2019: In relation to autopilot and Full Self-Driving (essential for robotaxis): “We are making progress towards stopping at stop signs and traffic lights.” No report since then on whether the monumental challenge of stopping at stop signs has been surmounted.

October 2019: “One accident for every 4.34 million miles driven in which drivers had Autopilot engaged. The national average is one accident for every 0.5 million miles.” Grossly misleading. Autopilot is engaged on motorways. The vast bulk of accidents happen off motorways - probably near stop signs and traffic lights, which are proving such a challenge for Tesla’s autopilot.

Tesla can boast some great achievements, but at what cost? By September 2019, it had taken around $18 billion from shareholders (in current money terms) and another $13 billion from bondholders. Shareholders have no prospect of getting any return on their investment for years into the future (if ever). They lost a further billion dollars in 2018 and again in the first nine months of 2019.

Yet those same shareholders seem to think that, in five years’ time, Tesla will be generating profits of over $5 billion a year. Hope springs eternal.

That explains why I’m still short Tesla.
 
Hi Colm

That is very interesting but would that not be typical of any new business venture?

He has a vision and a plan, but it's very difficult to get the timeline right for that plan.

In other words, he might well achieve his targets but just a few years late.

Especially, when he is trying such ambitious things.

I too am short Tesla. But for a much smaller amount and while I expect to make a profit on my position, I am prepared for the fact that I might be wrong and that I might lose money. Or even if I am right, that the market remains wrong for a long time.

Brendan
 
That's very interesting Colm. For me, I am very interested in the trend where they are announcing great Q4 results as we approach year end and then we revert to loss making quarters in the new year. I am not suspicious by nature but..........
 
Brendan
Of course losses are to be expected in the early years of a new venture. For any business however, young or old, the golden rule for managers should be to under-promise, over-deliver. One could argue that this rule is even more important for a new venture. Aside from breaking this golden rule, some of Musk's statement (and I'm not even going near his tweets, which are notorious) are highly misleading, to say the least. Take, for example, the one on accidents, quoted above.
There is the additional point that Tesla hardly qualifies as a "new business venture" at this stage. It's more than 10 years old.
 
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