Tesla has reached its artificial milestone of producing 5,000 Model 3s per week, and media outlets (and buyers) continue to post rave reviews. The company’s three vehicles are the three top-selling EVs in the US market. Model S has been consistently outselling every competing large luxury sedan for a couple of years, and it appears as if Model 3 will similarly dominate the small sedan segment. At least two sets of auto industry experts (Munro & Associates and a group commissioned by German automakers) have performed teardowns of Model 3, and concluded that the new EV should be earning a healthy profit margin.
Above: Tesla store (Image: Tesla)
Does this really sound like a company in trouble?
Short seller Jim Chanos and a host of other TSLA bears seem to think so. What do they know that we don’t? Rising youtube star Galileo Russell recently refuted Chanos’s list of anti-Tesla arguments point by point, and trader jesselivenomore detailed how Chanos and others have a history of manipulating the media to influence companies’ stock prices for fun and profit. Both thinkers have recently published follow-ups to their earlier presentations.
In a new video, Galileo Russell argues that the logic behind shorting TSLA has nothing to do with its products, and everything to do with financial engineering. As long as Tesla is reliant on the capital markets, it’s reliant on a perception of solvency. In other words, if potential investors can be convinced that the company is insolvent (whether it really is or not), they’ll remove their chips from the table, and a manufactured story will become a self-fulfilling prophecy.
Above: Galileo Russell discusses the real reason he believes Jim Chanos is short Tesla (Youtube: Hyperchange TV)
Companies in hyper-growth mode invest more money in developing new products than they bring in from sales of existing products. To keep the party going, they must continually raise new capital by issuing stock or bonds. Thus they are vulnerable to bad news, real or invented, that adversely affects their stock price and/or bond ratings. Tesla, which has been posting hefty quarterly losses for years, is the epitome of this kind of funding model, and that presents a huge opportunity for short sellers: convince enough people that the company’s in financial trouble, and soon it will be. As investor confidence declines, the stock price goes down and bond interest rates rise, making it more expensive for the company to raise the capital it requires, and a vicious cycle (or a virtuous one from the short sellers’ point of view) starts spinning faster and faster.
Galileo concedes the brilliance of this theory, but doesn’t believe it translates to reality in the case of Tesla. One thing that Average Joe and Jane may not understand (but finance experts like Chanos understand perfectly) is the difference between expenses and capital investment. As Galileo illustrates with a look at pertinent parts of Tesla’s financial statements, the reason for Tesla’s infamous cash burn is that it keeps plowing huge sums into future projects. As your favorite author has pointed out, if failure were imminent, Tesla could freeze R&D spending, put cash-gobbling new products such as the Semi and Roadster on hold, and continue as a small but profitable automaker selling its three highly popular vehicles.
However, that’s a worst-case scenario that no EV-lover wants to see, so Tesla’s continued dependence on capital markets is “a key weak point in its business model.” No matter how many wonderful things Tesla is building, sooner or later the financial music will stop, and funding will dry up. Hence Tesla’s quest to become cash-flow-positive in Q3 and Q4 of this year, which Galileo calls “critical” for the company. Once Tesla can fund its operations from income, its dependence on the capital markets could end, and the shorts will be free to huff and puff all they like.
Meanwhile, Rob Maurer recently interviewed the mysterious jesselivenomore, who turns out to be a professional trader named Chris, for his Tesla Daily podcast. In the 44-minute interview, Chris expands on the points he made in an earlier series of posts on the Tesla Motors Club Forum. In years past, Chanos and colleagues, including several well-known hedge fund wizards, have targeted various companies, including Canadian insurance company Fairfax Financial (a story originally chronicled in The Divide by Matt Taibbi) and the late SolarCity, and Chris believes that they are now using the same set of financial and media tools against Tesla.
Predatory short sellers target financial and insurance companies because they depend on the capital markets, and Tesla has become much like a financial company. Galileo and Chris agree that the greatest threat to Tesla is not the legacy automakers’ ham-handed attempts at competition, but rather the perception of insolvency that could cut off its access to capital.
However, while Galileo respects Chris’s analysis, and discusses it in depth, he also detects a whiff of conspiracy theory - he doesn’t believe “bad actors” are out there planting negative stories to try to bring down the TSLA stock price, although he concedes that there are certainly plenty with strong incentives to do so.
Whatever the motives and methods behind Tesla’s financial enemies may be, the company’s path to victory is clear. If Tesla can start generating profit and positive cash flow, its solvency will be demonstrably real, and it will no longer need to worry about peoples’ perceptions. So that’s the next milestone to watch for: now that the California carmaker has started putting the marvelous Model 3 in its patient customers’ driveways, it needs to start putting some black ink on its income statements soon.