Due to Elon Musk's erratic behavior and Tesla's declining stock price in recent months, Tesla's future has been a topic that many investors have passionately argued about. In this article, John Church argues that Tesla is a great long-term investment, while Julian Thesseling argues that Tesla has too many fundamental issues that will inevitably impact their long term market value.
Notable Silicon Valley investor Chamath Palihapitiya said of Tesla, “Half the people in this room probably think it’s one of the best companies in the world, and the other half probably think it’s something close to either a fraud or bankrupt .” Tesla has become a stock with extremely passionate shorts and longs. Indeed, some people who short Tesla have trouble understanding how anyone could possibly long the stock while Tesla continues to be unprofitable. Prominent Tesla short and Hedge fund manager Simon Black expressed his incredulity at how this could happen, “Who in their right mind would continue to finance this money-losing operation? Up to this point, it has been from growth investors who have likely never owned an auto stock before. Once they figure out the industry and the truth about Tesla’s future, we doubt it will continue.” If Tesla was a traditional car company, I would agree; its’ prospects would be dismal. Tesla may make cars, but its growth prospects and technological dominance far exceed any other car company on the exchange.
Most shorts make no arguments against the long-term trends that have propelled, and likely will continue to propel Tesla’s growth. They instead focus on profits, tax benefits, and other metrics more suited to determining the survivability of an entrenched commodity producer than a company that has redefined an entire market over the last 4 years. Tesla longs are accused of banking on a moonshot and being simultaneously too optimistic in Tesla’s ability to perform as a company and in its ability to make the world a better place. Tesla, though, is much more than an empty hope. Considering the strong lead Tesla has in so many areas, it is completely irrational to ignore the likely shifts in significant market trends that promise to lift Tesla’s prospects for growth and stability.
Take, for instance, the public sentiment shift that is driving demand in electric car consumption and will contribute to the long term depression in the oil markets. According to Bloomberg’s Electric Vehicle Outlook report, electric vehicles are forecasted to rise from a record 1.1 million sales in 2017 to 11 million in 2025 and 30 million by 2030 as their cost of production falls below that of traditional combustion vehicles . These increases are forecasted due to both changes in public sentiment and shifting government policy . Countries such as the UK and France have gone as far as to make the commitment to end all sales in traditional petroleum-fueled cars by 2040 . The question, then, is not if electric cars will come to dominate the market, but instead, who will benefit from that shift.
"The question, then, is not if electric cars will come to dominate the market, but instead, who will benefit from that shift."
There are reasons to count on Tesla enjoying a large share of this wider market. Most of these reasons stem from the fact that Tesla has spent years developing this technology while its competitors have not. Many large car companies have only recently begun earnestly investing in electric cars. For instance, Tesla's battery technology is currently unparalleled . No other car company has achieved the range and the charging speed that Tesla has. Additionally, other car companies and their suppliers may be too far behind the demand curve, as increasing production in battery packs is difficult and takes time. Tesla’s cars are also simply of a higher quality and seem to possess more favorable public sentiment. Tesla’s self-driving software is also a leader in the field and yields the company a 100% gross margin .
The reason many longs are expecting explosive growth, though, has to do more with the way Tesla operates. Tesla is a company that has redefined the norm for cars again and again. It has forced entrenched car companies that have remained technologically stagnant to innovate while actually making electric cars fashionable for the first time. Tesla produces cars with the best range and highest safety ratings at an incredible quality. As Palihapitiya said,
“Tesla’s electric cars and other new-of-their-kind inventions may very well do what the iPhone did for Apple,” he said. “The point is, there’s a lot of other things that are in the offing here that we don’t even know about, ”
It is almost nonsensical to compare Tesla to traditional car companies when you look at the fundamentals of how the two operate. Compared to older car companies, Tesla has a heavy advantage in research. It is also nimbler on account of its newer, less bureaucratic infrastructure, as well as its lack of heavy, outdated assets. So long as Tesla continues to hold itself to the standard it has in the past and continues to bring new technologies to market, there is no reason it should not be treated the same as a tech company. As such, it should be evaluated with the friendlier view of profitability that entails. We can expect Tesla to continue redefining the market by developing all-new products.
If one is still swayed by the arguments of the shorts for the economic instability of the company, there is one more factor that should be taken into consideration. This is the potential of Tesla and Elon Musk to change the world for the better. To clarify, the argument that Tesla should not be shorted upon consideration of its non-fiscal benefits is not necessarily an argument that should determine investment decisions. What one wants to succeed is often very different from what actually does succeed based on the preferences of consumers. By only investing in companies that one thinks stand for good causes and shorting the companies one disagrees will likely not only set oneself up for failure, but would also be getting in the way of the system of creative destruction, which promises to replace the failing, though possibly admirable, companies with more economic alternatives. For example, it would have been very foolish to short Amazon and invest in Barnes and Noble because one would rather Americans go to bookstores and read physical books.
However, Tesla’s case is different. Instead of Tesla stock suffering due to failures on Tesla’s part, Tesla has been negatively affected by the burden of an immense short movement. Misled by the perception of Tesla as a traditional car company, many high profile shorts have begun actively trying to move the stock price lower. As a result, far more negative press about Tesla is aired than normally would be. This pushes more investors against Tesla, increasing the number of short sellers and voices predicting the supposed imminent demise of the company. This movement to short Tesla is made even more unfortunate by the fact that it has set its sights on a company that aims to do objectively good things for the world. Tesla aims to decrease our impact on the environment both through the ways we get around and the way we power our homes. Elon Musk’s personal ventures, which are also directly impacted by the success or failure of Tesla, range from revolutionizing public transport to advancing human endeavors in space.
Considering the potential benefits of Musk’s endeavors on humanity as a whole, it is baffling how someone, in good conscience can fight so ardently for Tesla’s destruction. This is especially egregious considering that there are countless other companies that are backwards, bloated and doomed to fail. Those are the companies that should shrink to make way for newer, more profitable, and more innovative ventures. Shorting Tesla is likely an unprofitable decision and certainly an unadmirable one.
Despite excellent brand recognition and an unparalleled lineup of electric cars, scrappy US automaker, Tesla’s lead is beginning to narrow, as established carmakers begin to test their own electric vehicles. To make matters worse, Tesla CEO Elon Musk’s erratic behavior and overt ambition threatens to push the fledgling carmaker into bankruptcy. It is no surprise then that the movement to short Tesla stock has gained steam in the past few months, as issues with production of Tesla’s new Model 3 vehicle and Musk’s self-destructive actions have both increased in frequency.
It is perhaps natural that companies would regard short sellers as an irritant, as they are investors who are actively hoping for poor performance. However, Elon Musk has embarked on a campaign to vilify them like no executive in recent memory despite a tweet from 2012 musing that “even though [short sellers] cause me grief, I would defend the right of shorts to exist.” He has since reversed his position, as he tweeted in October 2018 that “[short sellers] are indeed reasonably maligned .” Indeed, the Tesla CEO has become increasingly frustrated by the numerous quality control and production issues plaguing the (more) affordable Tesla Model 3 sedan. The future of Tesla rests squarely on its ability to deliver this $35,000 car quickly and efficiently to the more than 400,000 people who have paid deposits to reserve a vehicle. Despite the apparent success of the Model S and Model X, the $75,000 starting price is simply not accessible to most of the population. It cannot be enough to sustain the company. According to current engineers at Tesla, the company is still making the Model 3 batteries partly by hand, and has requested dozens of Panasonic employees to help with battery assembly . Short sellers such as Stanphyl Capital’s Mark B. Spiegel told CNBC:
“While I've no doubt that Tesla will eventually work out its Model 3 production problems, the base model will cost Tesla at least mid-$40,000s to build. The company will never deliver more than a token few for less than the current $49,000 lowest-cost offering. Sales will hugely disappoint relative to expectations of over 400,000 a year. And even at those higher prices Tesla will never come anywhere close to its promised [profitability] .”
This is concerning in several regards. The first being that it must deliver a $35,000 base Model 3 to its customers without losing almost $10,000 on it. This means that it will only be able to deliver higher-capacity and higher-tier vehicles. This neglects the customers who Model 3 is really meant for: those who cannot afford the high asking prices of luxury electric vehicles like the Model S and X, and those who still admire the Tesla brand or want to invest in electric cars. This inability to ramp up production is letting competitors like Chevrolet poach Tesla’s customer base with impressive first offerings like the Bolt, a $37,000 all-electric sedan with the clout and footprint of an established carmaker.
Production issues might be easier to stomach if they translated into a high-quality product. However, several new Model 3 owners have reported cases of dead battery, leaking components, body panels that don’t line up, and rattling in the cabin . “The car is extremely noisy at speeds about 50 to 60 miles per hour,” Model 3 owner Parvis Ghajar told the New York Times, “If you’re asking about my own experience, I might have bought something different .” Going off of this, a 6,600-hour teardown by automotive consultant Sandy Munro demonstrated several unnecessary complexities in the Model 3 chassis, such as its rear wheel well, which is made of nine pieces of sheet metal while the Chevrolet Bolt has just one piece .
"This combination of quality-control issues and an inability to efficiently manufacture the Model 3 leads to an expensive yet flawed vehicle. “If that car was made anywhere else, and Elon wasn’t part of the manufacturing process, they would make a lot of money,” Munro said in an interview ."
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