The Perils of Shorting: A Real Life Example

[joe sod]

@Colm Fagan well you are getting a bit of a break now on your Tesla short, a much bigger fall than the Dow yesterday, maybe its exposure to China that is hitting Tesla now. Usually when something out of left field hits a sky rocketing stock like Tesla, then investors pause for breath and thought and the enthusiasm dissipates. Even when the corona virus fear goes away again the enthusiasm to keep driving this stock higher will also be gone.

 

[Colm Fagan]

Hi @joe sod Thanks for your concern! I need all the comfort I can get these days but I'm with @Brendan Burgess in thinking that it could take some time for this particular story to play out. Full-year results tomorrow, but they may not advance the discussion much. I'm reconciled to having to hold out, possibly for another 12 months, before closing my position. I could end up losing heavily, but Tesla's execution has to be almost ************************* to justify anything close to the current market valuation. As @Sunny noted yesterday, car makers have not been kind to investors. Lots can go wrong: design flaws, product recalls, assembly line hiccups, etc. With its low investment in R&D, Tesla is more prone to banana skins than most.

 

[sabre Man]

How do we know that? Is it even legal to switch it on in this country?

Autopilot was nerfed due to EU regulations last year, which actually makes it less capable but it still works well in Ireland and can be activated anywhere where the car can see the lanes.

I encourage you to check out EV TV Ireland on YouTube, where you can find a playlist of Autopilot videos which demonstrate how Autopilot works in Ireland.

 

[Fella]

I fear I may be turning into @Colm Fagan as this month I did invest in one company which I like instead of my usual investment trust or REIT , maybe I am a young Colm after all!

 

[Colm Fagan]

Hi @Fella I hope that it was also at the right price! It's no good buying into a company you like at too high a price.

 

[James Kirk]

Hi @joe sod I'm reconciled to having to hold out, possibly for another 12 months, before closing my position. I could end up losing heavily, but Tesla's execution has to be almost ************************* to justify anything close to the current market valuation. As @Sunny noted yesterday, car makers have not been kind to investors. Lots can go wrong: design flaws, product recalls, assembly line hiccups, etc. With its low investment in R&D, Tesla is more prone to banana skins than most.

that's a lot of negativity with short "investing" in one paragraph Colm.
1. 12 months of waiting for the market to turn on Tesla when it hasn't in 10 years.
2. If Tesla keep doing what they are doing you will loose heavily.
3. S*it happens to auto makers and you hope it happens to Tesla as well.
4. For a company not spending as much as some on R&D they continue to leave the auto industry in the dust with pipe line and innovation.
5. What banana skins? Look at the graph of Tesla growth and compare to the "most" in the auto industry. I think Tesla are growing sale at over 60% compounded.

 

[joe sod]

For a company not spending as much as some on R&D they continue to leave the auto industry in the dust with pipe line and innovation.

Well Tesla is very far from the Ford Model T progress, it only sold 367,000 cars last year, 11 years after it started production
The model T sold 11,000 units in 1909 at a price of $23,500 in todays dollars
by 1920 it sold a 1,400,000 units at a price of $5041 in todays dollars

and this long before automated assembly lines and computers. So Tesla will not be joining the Model T in revolutionary changes in car manufacturing. They are not growing fast enough and they are not getting their unit cost down like Ford managed to do way back when. In other words Tesla will not be producing "the peoples car", they are just too expensive.

 

[Colm Fagan]

Hi @James Kirk
You really are an Elon Musk fan!

1. 12 months of waiting for the market to turn on Tesla when it hasn't in 10 years.

The market has turned on Tesla many times, even since I started following it in 2018. I opened my first short position in January 2018 at $362 a share and closed it later that year at an average $307 a share. I opened my second short position at $310 a share and closed it at $281 a share. I also made profits on my third and fourth short positions. As everyone knows, things haven't gone so well recently (what an understatement!), but the race isn't over. You can rest assured that the market will turn on Tesla many times in future.

2. If Tesla keep doing what they are doing you will loose heavily.

What has Tesla been doing? It took $18 billion from shareholders and another $13 billion from bondholders, it's losing money hand over fist, yet shareholders think it will pay them back over five times what they paid in. My money is on the boy who said the emperor had no clothes.

3. S*it happens to auto makers and you hope it happens to Tesla as well.

S**t has already happened - many times. Last year for instance, it took a charge of more than $120 million for buy-back guarantees on some of its cars. Last year too, Walmart sued it for solar panels that allegedly caused fires at seven of its stores. It accused Tesla of “years of gross negligence and failure to live up to industry standards”. The case was settled in November. I don't know how much it cost Tesla. We'll probably know tomorrow night.

4. For a company not spending as much as some on R&D they continue to leave the auto industry in the dust with pipe line and innovation.

They don't. You saw what happened with the Cybertruck 'launch'. I quoted earlier from the Q2 report in relation to FSD (full self-drive), that Tesla said it was 'making progress with stopping at stop signs and traffic lights.' Not exactly awe-inspiring. Waymo (the Google subsidiary) leads the field in FSD by miles (actually thousands of miles). Tesla is nowhere.

5. What banana skins? Look at the graph of Tesla growth and compare to the "most" in the auto industry. I think Tesla are growing sale at over 60% compounded.

Volkswagen sells 10 million cars a year, Tesla less than 400,000, yet its market value is greater than Volkswagen's. That's anticipating a hell of a lot of growth.

 

[SPC100]

The Perils of Shorting: A Real Life Example

Yahoo Finance has a good summary of all the forecasts. https://www.tipranks.com/stocks/tsla/price-target 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 Assuming that...

www.askaboutmoney.com

It only has to keep it's market share consistent and ev grows 4-5 fold. And make 4k profit per car.

I think everyone agrees that the ev market share is growing and Tesla is very desirable brand. And with enough time they can ramp production.

The question is what profit can they make per car.

 

[elacsaplau]

……..it's losing money hand over fist

This is simply not true.

The last two quarters (yes - confirmed here first!!)……...have been profitable. The full-year 2020 is very probably going to be profitable also.

Tesla may very well be over-priced but let's stick with the facts please.

 

[Brendan Burgess]

This is simply not true.

Hi elacs

It's debatable.

I could have a business that is profitable some months but loss making on an annual basis.

With the wide scope open to companies to calculate profits, it's relatively easy to report a profit or a loss in any quarter or even in any year. It's more difficult to report consistent profits every year, if there are no underlying profits. Although Irish banks did manage it.

So what can we say about Tesla?

1) It has had huge accumulated losses which is what you would expect from a company in its early days
2) It has reported profits in the last two quarters

So I would say "It has been losing money hand over fist" rather than "It is losing money hand over fist".

Brendan

 

[Colm Fagan]

Hi @elacsaplau
I don't know if you were crowing when Tesla recorded profits for shareholders in Q3 and Q4 of 2018, which were higher than will be recorded for the corresponding quarters in 2019. I remind you that the profits in Q3 and Q4 of 2018 were followed by losses of $0.7 billion and $0.4 billion in Q1 and Q2 of 2019 respectively. Overall, both 2018 and 2019 were highly loss-making.

The full-year 2020 is very probably going to be profitable also.

Do you realise the scale of the challenge Tesla has to overcome to justify its current market value? The market assumes that it will turn the corner very soon - it probably has to be this year- and that profits will grow quickly from there. In an earlier post, I reckoned that it will need to be generating profits for shareholders of $5 billion a year (and increasing consistently) five years from now to justify the current valuation. The true figure is probably higher, as I've implicitly assumed that they won't go back to shareholders for more funds (more piggies at the trough) nor that seepage in the form of share awards to Musk and his buddies won't be excessive. I haven't gone into the details of his package, but I suspect that, if the company is making that much money in five years' time, Elon Musk will grab a significant slice, leaving less for ordinary shareholders.
As I said to @Fella yesterday, it's great to invest in a good company, but it has to be at the right price.

 

[elacsaplau]

So I would say "It has been losing money hand over fist" rather than "It is losing money hand over fist".

Well, not really, Brendan! "Donald Trump is a good President" is debatable! You could argue either way!! This is different!

The former statement is true, is actually and factually correct - the latter is simply not. It should be seen in the context of Colm's recent post giving out about Musk making things up or, at least, making statements with insufficient precision . Black pots, kettles and all that! Just my $0.02........

 

[elacsaplau]

Do you realise the scale of the challenge Tesla has to overcome to justify its current market value?

Colm,

You are arguing a separate point here. [If I said that the front door of house no. 3 on that street is green - telling me that no. 4 is definitely blue is not particularly relevant and may even serve to distract from confirming the colour of number 3!]

The above relates to the extent of the challenge to create sufficient profits to justify current valuations. I am not disputing that.

All I was saying is that the blunt statement that Tesla is losing money hand over fist is wrong or, at the very least, highly, highly misleading.

Put it another way - are you saying that Tesla will definitely be loss-making in 2020?

Very serious question - what % probability would you ascribe to Tesla to being profitable for the full year 2020?

 

[Colm Fagan]

@elacsaplau I honestly don't have a clue what you're talking about, referring to colours of front doors! I thought we were discussing whether Tesla's current share price was reasonable. I was trying to address that question sensibly and logically. I was hoping for a response in the same vein.
As regards whether Tesla will make a profit in 2020, I simply don't know. What I'm saying is that, if the pattern of 2018/19 is repeated, we'll see losses in the first two quarters of 2020, which will more than wipe out the profits in the last two quarters of 2019. These will then be followed by small profits in the final two quarters of the year; however the main point is that, if Tesla is to have any hope of justifying its current share price, it needs to start making profits consistently, and quickly. The profits must keep growing so that they reach $5 billion a year by 2025, and keep growing from there, without any significant dilution of existing shareholders' interests. You can then start thinking about the colours of front doors.

 

[Sunny]

This is simply not true.

The least two quarters (yes - confirmed here first!!)……...have been profitable. The full-year 2020 is very probably going to be profitable also.

Tesla may very well be over-priced but let's stick with the facts please.

The facts are that the last two quarters of 2018 were profitable. Great shouted everyone. They have turned the corner. Q1 2019. Huge loss and 2019 continued to be loss making until you guessed it, the last two quarters of 2019. So what are the company themselves guiding for Q1 2020? Yep another loss. And probably the same with Q2. As for 2020 profitability, I will take a bet now that the company will not be profitable this year but I don't know.

Quarterly profits don't make a company profitable. There are plenty of ways to manipulate annual accounts coming up to year end to paint a prettier picture. There are endless ways with quarterly accounts. Quarterly profit means squat. They are only useful for trends.

Just last year, Musk was warning that the company could run out of cash in 6 months. Now suddenly it is a $100 billion company without the sales or profits match.

Reading some of the posts above and if we take them as a fair reflection of how Telsa investors feel about the company, then people are going to get very burnt......

 

[James Kirk]

Yes I am a Musk fan. I am a Tesla Share holder with well over 100% profit from a buy and hold investment. Not a big fan of shorting either

The market has turned on Tesla many times, even since I started following it in 2018. I opened my first short position in January 2018 at $362 a share and closed it later that year at an average $307 a share. I opened my second short position at $310 a share and closed it at $281 a share. I also made profits on my third and fourth short positions. As everyone knows, things haven't gone so well recently (what an understatement!), but the race isn't over. You can rest assured that the market will turn on Tesla many times in future.

There is a huge difference between the market turning on a company and normal stock market fluctuations. In 2018 TSLA traded between $260 and $360. It peaked 5 times and toughed 4 times. You could have made easily as much cash buying low and selling high as shorting.

What has Tesla been doing? It took $18 billion from shareholders and another $13 billion from bondholders, it's losing money hand over fist, yet shareholders think it will pay them back over five times what they paid in. My money is on the boy who said the emperor had no clothes.

What growing company doesn't borrow money? That's just business. Bond holders will be paid as agreed. As for share holders, I have a feeling most of them are X 5 already and I'd be willing to bet a very small % would sell their share today even if they were. Tesla will make a loss for FY19 but in the millions not the billions. However in 2020 the profits will be in the billions not the millions

S**t has already happened - many times

Of course it does. To every company. Eg... diesel gate. Eg.. US Auto industry government bale out Eg.. Carlos Ghosn. you are shorting the wrong auto company. Any of the others would have made you a very tidy profit shorting them over the last few years. My point there wasn't that thigs don't happen. It was that if you are waiting for s**t to happen to make money that's not investing. It's just gambling. You might as well short Ryanair and hope for a plane to crash.

They don't. You saw what happened with the Cybertruck 'launch'

Obviously all you saw that night was a window smash. Did you notice the Cybertruck the window was in? Did you notice the media coverage all over the world the next day? Do you know the Model Y will start deliveries shortly and has been specifically designed to allow for efficient manufacture. Even leaving aside self drive developments, solar roofs, battery advancements ect ect that all comes from R&D. If the spend is low and the results are there to be seen how can that be a negative especially since you consider borrowing money to drive growth a negative as well?

Tesla is nowhere.

Start 2 mins in.

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[elacsaplau]

Colm,

You're a gas man.

Earlier - Tesla is making "losses hand over fist". With a little probing this has now become....

As regards whether Tesla will make a profit in 2020, I simply don't know.

If you don't know something, why make it up??!! Seriously.

Anyway, I made my point - I'll leave it at that - don't have Fella's patience of saying the same thing 19 times!

My beautiful door colour analogy really isn't that hard to follow!

 

[Sunny]

Colm,

You're a gas man.

Earlier - Tesla is making "losses hand over fist". With a little probing this has now become....



If you don't know something, why make it up??!! Seriously.

Anyway, I made my point - I'll leave it at that - don't have Fella's patience of saying the same thing 19 times!

My beautiful door colour analogy really isn't that hard too follow!

The more I follow this thread and the more I read about Tesla, the weirder it sounds. I don't remember ever seeing such an emotional stock.

 

[Brendan Burgess]

The results will be webcast at 23.30 Irish time tonight.

You can follow them here:

https://edge.media-server.com/mmc/p/6ng4gj6b

I think you might have to register first.

Brendan