The Perils of Shorting: A Real Life Example

Colm Fagan said:
Tesla's debt is higher than VW's as a percentage of revenues
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VW's debt to equity is higher that Tesla's.

Colm Fagan said:
I thought the purpose of a business was to generate profits for shareholders
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I'm a share holder. I'm very happy with my profit. Where are all the unhappy shareholders that are not making a profit?


Colm Fagan said:
For how long does a 16-year old company want to be treated as a start-up, and not be expected to be generating positive returns for shareholders by now?
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Tesla has generated a positive return for shareholders. The company has also been profitable for the last 3 Q's. Who is treating Tesla as a Start-up?
Tesla is a growth company. growing at 50%yoy. Not many current shareholders (if any) are unhappy with Tesla's business plan.

Colm, you are determined to only see the downside here. Nothing I can say will make the slightest difference and that's fine. I had this same discussion with Brendan months ago and he still hasn't seen the light and is unlikly to. The cards continue to be stacked in Tesla's favor so we'll see how it goes.
 
elacsaplau said:
I can never understand why people make things up to support a thesis. Surely, what should matter is what's right and not trying to win the argument?
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Lately I see TSLAQ giving up on figure all together because they were so easily corrected. All of what they predicted for the last few years has now become the present and proven to be 100% wrong and even fabricated. Not saying Colm or Brendan are in that camp but it's easy to be sucked into their web and decisions are made based on half the information and a hunch that they can't actually explain when asked to.
 
James Kirk said:
I'm very happy with my profit.
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I'm sure people who invest in pyramid schemes are happy with their profit as long as they can find bigger fools prepared to buy at ever higher prices. The reality is that Tesla hasn't turned a profit in any of its 16 years. It keeps promising profits "soon" and keeps sucking in additional capital from gullible investors who think the pyramid scheme will last forever.
James Kirk said:
VW's debt to equity is higher that Tesla's.
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Doh! Of course VW's debt to equity ratio is higher than Tesla's. That's because it doesn't keep tapping shareholders for money, so the denominator in the debt to equity calculation stays broadly constant rather than increasing as more people are sucked in.
 
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Colm, with respect, you’re applying analogue methods of analyis in what is now a digital world. It’s akin to value investors bemoaning the failure of value stocks versus growth stocks or old-school investors who crave dividends and pure profits. What investors should want is great companies like Amazon etc that take their cashflows and reinvest them to make even more money.

The discussion around Tesla could be analagous to previous debates around Amazon, Facebook, Apple, Netflix, etc.

As Baillie Gifford point out, it’s as much a software company as a car company. They were early stage investors in Amazon and in Tesla. They reasserted their conviction re Tesla only recently. Isn’t there a chance that you’re wrong to be so focussed on their P&L?
 
The point that you’re missing is that the greatest and most valuable company in the world could, in theory, make zero profits.

It is really naive to simply bang the proberbial profit drum.

Take a company like Revolut. They make no money. Some people lampoon them for it. They have a great product. Everyone uses it. Everyone loves it. They have all our data. It’s just silly not to make the leap that there are significant future cashflows to be made from all of that and to be discounted to arrive at a valuation.

Applying your logic, if I spent €10bn this year successfully discovering the cure for cancer and the market valued my company at €100bn, Baillie Gifford might be hanging on as early stage investors whereas you’d be lampooning me for losing €10bn in 2020 and not paying any dividends!
 
Colm Fagan said:
The reality is that Tesla hasn't turned a profit in any of its 16 years.
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One shouldn't singularly focus on where the puck was. Isn't Tesla expected to satisfy all the criteria - including the profitability requirement - for inclusion in the S&P this year? So, the stand-alone historic reference to profitability is disappointing and misleading but not altogether surprising...….a few months ago, you said that "it's losing money hand over fist" no less!
 
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I can see that this discussion is leading nowhere, but I'll have one last try at explaining where I'm coming from.

First of all, forget about the current share price and its past trajectory. That's a red herring in the context of valuing the business. If someone made a fortune by buying at one price and selling to someone else at a higher price, lucky for them, but it's just shuffling the cards and is irrelevant as far as placing a value on the business is concerned. I think we can all agree on that. To avoid going down this cul de sac, let's assume that you were the sole owner of the company for the last 16 years or whatever.

In that time, you ploughed $15.4 billion into the company. You borrowed another $13.9 billion, on which interest has to be paid and which will have to be repaid sometime. What do you have to show for your money? The manager doesn't see it paying a dividend for years to come, if ever. On the contrary, it's likely that you (and bondholders) will be asked to invest even more before it turns the corner. At best, it will make a marginal profit this year; there's a strong possibility it will lose money again.

Its assets consist mainly of factories, which are subject to depreciation, and unsold cars. Unlike companies like Amazon, Facebook and Apple, there's not a massive moat protecting you from competitors, which will allow you to earn windfall profits in future, although I can see this as a possible area of disagreement. (If you think it does have a protective moat, tell me what it is and what you think it's worth in terms of yearly profits.)

Now someone comes along and tells you that they will buy the business off you for $180 billion. (I think my sums are right. If they're wrong, I'm sure someone will correct me). They also promise to take on all the debt. If you accept their $180 billion, you can expect to earn in the region of $9 billion a year (5%) with a relatively small amount of risk by investing the money elsewhere.

My thesis is that I cannot see how Tesla can earn that sort of profit within the next 5 to 10 years, maybe never. In the meantime, you'll have to put up with forgoing the $9 billion a year that you could be earning, at much lower risk, from another business. Therefore, you must envisage it earning considerably more than $9 billion a year in the long-term. I just can't see that, or anything like it, happening.
 
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Baillie Gifford’s conviction remains. So I remain a happy holder of the stock indirectly. I think that knowing what you don’t know is a gift in itself. I don’t know what the future holds for Tesla. So I delegate to Tom Slater and his team who have a better idea based on their track record (e.g. they were early stage backers of Amazon and Jeff Bezos actually meets them).

“How big could Tesla become?

It’s no exaggeration to say that Anderson and Slater think the sky could be the limit for Tesla and that its probable prospects are not reflected even in today’s lofty share price.

Flood, a client service director at Edinburgh-based Baillie Gifford who speaks to investors on behalf of the Scottish Mortgage duo, explained the broad terms of the fund managers’ thinking.

It was clear from what she said that the pair were not taking profits on Tesla out of misplaced loyalty to Musk or from a disregard of investment common sense.

Acknowledging the ‘temptation after strong performance to take profits’, Flood quoted the investment saying ''don’t trim your flowers to water your weeds'' to describe how the fund managers wanted to run a portfolio of ‘committed positions’ which meant they were loath to interrupt the growth that Tesla shares could compound if left alone.

‘This is a deliberate choice,’ said Flood.

She said Anderson and Slater don’t believe it is possible to set a single target share price for companies like Tesla or any of their other key holdings such as Amazon, Alibaba, its Chinese equivalent, and gene sequencer Illumina.

Instead they forecast a range of scenarios, which while they include the risk of failure, in Tesla’s case have become increasingly optimistic.

Just looking at Tesla’s car manufacturing business, Flood said over five years it was possible to see a ‘low multiple’ expansion in the share price – eg, a doubling – based on the current progress in its X, 3 and Y models.

Tesla impressed investors by reaching a production run rate of 400,000 cars at the end of last year, which was no mean engineering feat, said Flood. Given the company’s growing experience in scaling-up car production, executing difficult projects and making manufacturing more efficient, it was possible to see it making 2m cars a year by 2025. This would still be less than either BMW or Mercedes Benz, she pointed out.

Growth forecasts could be raised further by adding in sales of Tesla’s new roadster, semi and cyber trucks, said Flood.

Other positive scenarios take in more aspects of the business, such as the potential to supply autonomous, self-driving cars for all its models.

Or Tesla’s growing business in solar energy storage where it makes the Megapack, Powerwall and Powerpack batteries for manufacturers and households.”
 
Gordon Gekko said:
The point that you’re missing is that the greatest and most valuable company in the world could, in theory, make zero profits.

It is really naive to simply bang the proberbial profit drum.
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Gordon. When I read that , I assumed you were being sarcastic.

Brendan
 
Brendan Burgess said:
Gordon. When I read that , I assumed you were being sarcastic.

Brendan
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Hi Brendan,

I’m not being sarcastic.

Jeff Bezos Explains Why Amazon Makes No Profit

In this 9 minutes video, Jeff Bezos is brilliant in his response to the question “Why Amazon Makes No Profit ?” In the video JBezos explains his business(es), shares great insights, and…
www.google.ie

In the video, Jeff Bezos talks about the danger of focussing solely on profitability.

His letter to investors back in 1997 is also well worth reading:


People spent years hurling mud at companies like Amazon and Facebook on the basis that they made no money. The same charge is levelled at companies like Revolut, Uber, and Tesla. The last couple of decades have taught us that it’s not that simple.

If nothing else, while some people are screaming about Tesla’s lack of profitability, specialists like Tom Slater at Baillie Gifford continue to back the company. Specialists with significant research resources and a successful track-record of buying such companies. It’s enough to make me think that focussing on profitability might be misguided.

Gordon
 
Hi Gordon

The focus has to be on profitability. But not necessarily short term profitability.

So focusing on short-term profitability is misguided.

It's very hard to see how Revolut or Uber will ever be profitable - even in the long-term.

Tesla might be profitable but I doubt it will be profitable enough to justify its current price. But I don't know what price would be justified. I have already lost through shorting it.

There is a conflict of opinion between the specialists who have made money by buying such stocks and the specialists who have made money by shorting such stocks.

Brendan
 
I'm not sure how to get it into peoples heads that Tesla is going to be one of the biggest companies in the world and not a pyramid scheme. It will never pay a dividend (I hope) because that is not the plan. Musk has said a moat means nothing in a digital age it's all about innovation. Tesla will never stand still.

I think if Tesla does make a profit some still won't be satisfied. I think that theory may soon be put to the test. Without a doubt they would have posted a Q2 profit if it wasn't for covid. Surprisingly they could still do it. With a big contribution from Gigga Shanghai Tesla could deliver 85,000 cars. If they do then a small profit is possible. That's the Q2 prediction from people who do crunch the numbers. Tight but still doable.

Everything these days comes with a covid warning but if the year continues with some kind of normality then 2020 will be profitable. Tesla will deliver the 500,000 vehicles as guided. That will lead to a profit of over $2billion.
 

Hi Brendan,

Revolut have over 1m users in Ireland. I’m a customer and so are you. I love their product. My friends and family all love their product. They have all the data in the world about me and possibly about you. Why is it such a leap of faith that a company with lots of users, lots of data, and a great product might pivot to making a few bob? Who has more chance of making a few quid, some start-up with a dodgy product or the company that owns the space? Facebook hoovered up all the users and then worked out how to monetise it.

Gordon
 
Gordon Gekko said:
Why is it such a leap of faith that a company with lots of users, lots of data, and a great product might pivot to making a few bob?
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Hi Gordon

I think that when they start charging for their services, they will lose their distinctive characteristics.

It's possible that they might become profitable. Though I don't see any reason for them to become megaprofitable.

Brendan
 

The key difference here is Amazon was directing its income into growth, while Tesla is barely making a profit and has been slashing its R&D.
 
As @trython says, Amazon and Tesla are like chalk and cheese. Amazon has a number of highly profitable businesses. It uses the cash flow from those businesses to finance its ventures into new areas. This is a terrific business model, provided of course that it can keep finding profitable new ventures. That is very different from incurring losses year after year and presenting the begging bowl to shareholders, at least once a year for the last eight years, looking for a bail-out. That is not a viable long-term business model.

I also agree with @trython that Tesla is skimping on R&D. That is never a good sign in a business.

PS: I've just looked at Amazon's investor relations page. It had net income of $3 billion in 2017, rising to $10 billion in 2018 and $11.6 billion in 2019. That's far from 'making no money'!!
 
Nobody is saying that Amazon 2020 is similar to Tesla 2020.

Analogue analysis in a digital world again unfortunately.
 
Henry Ford bought raw materials, assembled cars, and sold them to Joe Public. He had a profit and loss account.

Tesla also manufacture cars. It has a profit and loss account.

People seem restricted to looking at the latter through the prism of the former.

The issue is that the relatively near-term future is likely to be massively different to anything we’re used to. Vehicles will be electric and autonomous. The vehicles may be worth less than their software. At some point, none of us may own vehicles at all; we may simply order up a Tesla via Uber for the 2% of the time that we actually use our cars. It’s estimated that NOT owning a car might deliver a bonus to each household of circa $5k a year. And what about the insurance industry if there are no crashes? What about the drinks and entertainment industries if we can consume alcohol and watch movies while we drive? What about property prices if we can sleep/shave/work/watch tv as we commute and therefore care less about proximity to work?

The world is on the cusp of massive change and the role of companies like Tesla or Uber is unclear, but could be more significant than “do I buy a Tesla or a BMW?”. It’s why sitting at one’s kitchen table, pouring through Tesla’s accounts, and sticking on short trades is crazy in my view. There is more bubbling under the surface here than I can understand. I recognise that. Note that I am not saying that the share price will remain at current levels or multiply. I’m simply saying that there are paths to a world where I whistle up a Tesla that I don’t own via Uber, have Heineken delivered to my Tesla while I drive somewhere and listen to Spotify or watch Netflix all via my Tesla, all generating recurring income streams for Tesla outside of the initial cost of the vehicle. Good investing also involves being careful about what you don’t know.
 
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