[FLASHBACK] Tesla Shares -15% Since Our Industrials Analyst's Short Call

Editor's Note: Below is the invite to Industrials analyst Jay Van Sciver's Tesla (TSLA) short call published on June 14, 2017. Shares are down -15% since Van Sciver added it to his Best Ideas Short list. 

We’re hosting a LIVE (and free) Tesla webcast on Thursday March 22nd at 1pm ET. Van Sciver will explain why he thinks “if Tesla even survives to profitability, it would be an exceptional accomplishment” with Hedgeye CEO Keith McCullough.

Why Add Tesla Now? We are adding Short TSLA to our Best Ideas list, expecting underperformance as Tesla’s exciting concepts transition to mundane execution.  Concepts, ideas, and vision can easily win the market’s beauty pageant.  Grinding out a cheap version of a high-end platform in a competitive market, with a less tolerant customer and expiring tax credits?  That gets ugly. 

The goal in a story stock is to anticipate the next chapter.  Tesla’s valuation is silly, and we suspect most sophisticated investors realize it.  Short squeezes, as we would characterize the recent move in Tesla shares, often prove attractive short entry points.  Currently, many longs are gloating and shorts are no doubt miserable.  All this drama comes just ahead of new competition that may permanently degrade Tesla’s growth prospects.  Longs should be fearful and shorts greedy, as we see it.

Tesla is a temporarily subsidized maker of capital goods.  Established equipment markets have seen almost no competitive entry for decades; important structural hurdles typically preclude entry into markets like automobiles and electrical equipment.  As Tesla’s tax credits are exhausted, existing car makers can introduce EV models with as yet unused tax credits, adding to their already substantial edge.  If Tesla even survives to profitability, it would be an exceptional accomplishment.

Highlights

Euphoric Story Stock: Tesla’s edge supposedly stems from an ability to iterate faster than competitors, producing a more advanced product.  That narrative will be tested as competing products arrive over the next few quarters, among other narrative changing catalysts. 

A History of “Story Stock” Demotions:  Markets have a history of loving concept and vision more than even a successful execution of those concepts and visions.  The Model 3 need not be a failure.  Rather, it just needs to exist with all of the pluses and minuses of tangible execution.

First Loser Disadvantage:  As Tesla approaches its 200k registration mark, buyers should expect a halving of the $7,500 tax credit during 2018; eventual expiration follows.  However, late entrants to EVs will still be eligible for federal tax credits, placing Tesla at a disadvantage to new products from powerful competitors.  Credit expiration should start to impact *orders* going forward.  TSLA has introduced discount credits in addition to existing tax credits, suggesting slack demand for the S and X models even with little current competition.

Reflexive, Skewed Sentiment:  Sentiment for TSLA shares is overwhelmingly positive at the moment, with retail longs openly mocking experienced short sellers.  A higher share price helps Tesla in several ways, driving free marketing and plausibly weakening unionization efforts.

Key Catalysts, Competitive Entry:  Tesla faces a minefield of downside catalysts over the next 4 to 8 quarters as it emerges from a period of comparative stability.  

Used Channel Fill, Model 3 Waiting Line, Service Tolerance:  Tesla initially benefited from a lack of used units competing with new sales, but that may prove an incremental headwind.  While management implies that long Model 3 wait times encourage orders, it should instead drive buyers to new competitive products with intact federal tax credits.  Model 3 customers may not be as tolerant of service delays and other growing pains as existing Tesla-enthusiast owners.

Grid Vision, Solar City:  Tesla’s home products do not appear poised for broad adoption, and the utility storage solutions do not appear well adapted to the application.  Competing products are entering the utility market presently, and may jeopardize Lithium-ion’s long-term market share outlook.

Inconsistent Framing, Rationalizations: Investors are usually only short-term credulous.  Tesla bulls have many inconsistent metrics and rationalizations, such as the exclusion of development costs in margin discussions when faster product iteration, component deflation, and disruptive technologies are the presumed cure-all.  Autonomous driving could be readily tested by a company not limited to a small, all-electric vehicle fleet.

Ludicrously Overvalued, Short Squeezes:  While valuation is not central to our thesis, TSLA trades at a hefty multiple of everything – it doesn’t really make sense.  We suspect many holders haven’t noticed dilution, invest more for ‘identity’ reasons, and feel vindicated by the current squeeze.  While there is a substantial short interest, days-to-cover is not particularly high and a portion of the short interest relates to investments in other parts of the capital structure.

Perspective Comment:  Aside from the red wine and sleeping pill comment at the annual meeting, we are generally fans of Elon Musk, mostly like the cars, and very much approve of the mission of Tesla.  We think that Elon Musk is often unfairly criticized, and is a pretty spectacular individual despite whatever flaws he may have.  He executes his vision by the means available.  There is no reason we can’t generally admire the CEO, think the cars capable, and genuinely hope for a cleaner environment, but also think the stock is a wildly obvious, though volatile, short.