TSLA - Tesla Motors

[ERICOPOLY]

What I can't seem to reconcile is you are a spectacular investor. I would assume a spectacular investor is good at analyzing business models, capital intensity, focuses on owner earnings, acknowledges cyclicality, and uncertainty. But you seem certain that TSLA is a terrible short and don't seem to admit that it is egregiously overvalued. So I take it seriously when you say that, given your well documented record. But so far, I haven't seen you or anyone articulate how TSLA is a good capital lite business or how TSLA is a capital intensive business that wil earn very high ROE's for the next 20-30 years.

 

Well, I honestly am very bad at analyzing a business.

 

I look for investments that don't rely on price movement of the stock to make money.

 

Whereas you've found a short in TSLA that relies precisely on price movement.  What dividends are you going to ever get paid shorting it while the company slowly increases IV?  I mean, they just got $2b of really, really cheap capital -- believe it or not, the very existence of the sky high stock produces value in it's own right.

 

So like when you buy BAC last year for $11, or $7 the year before, or $5 the year before that.  And it's making $2 cash earnings this year.  And it makes those earnings even if they are a very mediocre bank.  That's the way to make some serious money IMO.

 

But if you think TSLA is 2x overvalued, it's like spitting into the wind.  You might as well try to go into a mosque and tell them that there is no proof of God.  Their bible is exactly what I described to you -- it's easy to come up with a reasonable narrative that gets to 100,000-150,000 very high margin vehicles.  And Musk is one hell of a visionary leader.  It's like Steve Jobs on steroids.

 

 

[blainehodder]

What I can't seem to reconcile is you are a spectacular investor. I would assume a spectacular investor is good at analyzing business models, capital intensity, focuses on owner earnings, acknowledges cyclicality, and uncertainty. But you seem certain that TSLA is a terrible short and don't seem to admit that it is egregiously overvalued. So I take it seriously when you say that, given your well documented record. But so far, I haven't seen you or anyone articulate how TSLA is a good capital lite business or how TSLA is a capital intensive business that wil earn very high ROE's for the next 20-30 years.

 

Well, I honestly am very bad at analyzing a business.

 

I look for investments that don't rely on price movement of the stock to make money.

 

Whereas you've found a short in TSLA that relies precisely on price movement.  What dividends are you going to ever get paid shorting it while the company slowly increases IV?  I mean, they just got $2b of really, really cheap capital -- believe it or not, the very existence of the sky high stock produces value in it's own right.

 

So like when you buy BAC last year for $11, or $7 the year before, or $5 the year before that.  And it's making $2 cash earnings this year.  And it makes those earnings even if they are a very mediocre bank.  That's the way to make some serious money IMO.

 

But if you think TSLA is 2x overvalued, it's like spitting into the wind.  You might as well try to go into a mosque and tell them that there is no proof of God.  Their bible is exactly what I described to you -- it's easy to come up with a reasonable narrative that gets to 100,000-150,000 very high margin vehicles.  And Musk is one hell of a visionary leader.  It's like Steve Jobs on steroids.

 

This is some of the best advice I have ever read. Thanks Eric. Really relates well to Warren's latest piece.

 

http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

 

•You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well.

 

•If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.

 

•Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn't necessary; you only need to understand the actions you undertake.

 

I would note that this piece of advice really only provides margin of safety on the downside, as Eric noted with BAC.

 

Does lack of cash flow provide margin of safety on a short? I don't believe so.

[thepupil]

So it appears we are arguing about the merits of shorting in general rather than whether or not TSLA is overvalued or the nature of TSLA's business.  You don't get paid a dividend, but you do get cash. Borrow is 50 bps at the moment, so no real issue there. A forced buy in is highly unlikely in a liquid $30B (on current shares stock). No one forces me to cover.

 

I have made much more money in my short investing "career" buying cheap businesses and assets than i have shorting (though i did get one 3X on puts of an obvious Chinese fraud in college lol). However, short selling is a skill i'd like to develop. A 5% position in TSLA  at $175 (and an already closed put position prior to that) was clearly a poor choice and the conventional wisdom has proven true thus far wrt shorting growth/valuation.

 

So I don't disagree with any of your points about shorting as speculation, and about your chosen style, but I guess we were talking past each other and arguing about different things.

 

 

[nikhil25]

Not sure if this has been posted before: http://gigaom.com/2014/02/27/the-sheer-size-of-teslas-massive-battery-factory-could-be-a-game-changer-in-many-ways/

 

Also, this thread has been a great read so far and it's exciting to see how Musk and Tesla continue pushing the envelope!

[rkbabang]

So it appears we are arguing about the merits of shorting in general rather than whether or not TSLA is overvalued or the nature of TSLA's business.  You don't get paid a dividend, but you do get cash. Borrow is 50 bps at the moment, so no real issue there. A forced buy in is highly unlikely in a liquid $30B (on current shares stock). No one forces me to cover.

 

I have made much more money in my short investing "career" buying cheap businesses and assets than i have shorting (though i did get one 3X on puts of an obvious Chinese fraud in college lol). However, short selling is a skill i'd like to develop. A 5% position in TSLA  at $175 (and an already closed put position prior to that) was clearly a poor choice and the conventional wisdom has proven true thus far wrt shorting growth/valuation.

 

So I don't disagree with any of your points about shorting as speculation, and about your chosen style, but I guess we were talking past each other and arguing about different things.

 

I wish you luck, I have nothing against shorting stocks, but shorting great companies with excellent management and popular products on valuation alone seems like an awfully dangerous thing to do.  In the end you may be right, but there are easier, and certainly safer, ways to make money.

 

[ERICOPOLY]

So it appears we are arguing about the merits of shorting in general rather than whether or not TSLA is overvalued or the nature of TSLA's business. 

 

 

Well, really it comes down to a lot more than that.

 

What's a value trap?  Traditionally, I've thought of it as a stock where you think you are getting a big discount to your perceived (insert narrative) IV estimate.  But then the earnings decline, the business declines, or the growth never materializes.  This happens with "too hard pile" stuff.

 

Ideally, you want to go long a stock that has stable (relative to your initial estimates) or growing earnings.  You can be wrong on IV and yet still make money if you are patient enough.  This is where it's wise to stick with "wonderful businesses" when you place bets on IV estimates.

 

Okay, that was "value trap" discussion for long investors.

 

How about for short investors?

 

Okay, here you want to find businesses with poor management, declining earnings, decaying business, competitors trampling them, going obsolete etc...  That way, you are more than likely not in a "value trap".  The short sale of the stock will eventually pay off for you.  Okay, so I think with TSLA I don't find those qualities.

 

I had considered shorting it by writing out-of-the-money calls -- but I went through this thought process... I went over the "how to justify this price" narrative... and I'm a veteran of the DOT.COM bubble days.  I remember a coworker who shorted YHOO in 1999.  I mean, I've seen this movie before.  I saw how it eventually ended too, of course -- but that's why I'm saying this is no EToys.com.  Elon Musk and his team put together the best car ever made on their first try and people are questioning whether they can grow at high rates -- well, how about 1,000 cars per week by the end of this year with only one model in the lineup. 

 

Can't you at least find a short target that has lousy management?  That can't execute?  That isn't a cult/religion?  That doesn't have Elon Musk?  I mean, there are 50,000+ stocks to choose from, and you pick this one.

 

 

 

 

 

 

[ERICOPOLY]

So to me, the short-selling version of the value trap is one where the stock stays expensive long enough for the fundamentals to catch up to the price where you shorted it (adjusted for your cost of borrowing the stock).  This is why I put forth the argument that today's price could be justified by 2020 (and that valuation is further adjusted for time value of money -- so you actually earn a satisfactory return, as opportunity cost is real).

 

And risk factors to the short sellers are:

excellent management

industry beating product

fanatical following

"new era" potential  ("new era" thinking keeps stocks inflated)

 

You practically tick off all the boxes with TSLA (the reasons for leaving it alone).

 

It's too dicey to go long, too dicey to go short.

 

Too hard pile in both directions, IMO.

[rkbabang]

Elon Musk and his team put together the best car ever made on their first try

 

And his other company just docked with the space station, is testing re-usable rockets, and plans to send people to Mars.  I have to give thepupil some credit for having brass balls that I don't have. If I was short anything Musk was involved in, at any price, I wouldn't be able to sleep at night.

 

[thepupil]

Understand all your points about shorting on valuation and growth and visionary companies. And for some context i own 5X as much berkshire, 2X as much CWH and ACAS and SHLD and BAM, etc (ya i own way too much Finance Insurance and Real Estate). They are far more likely to make me a lot of money than my TSLA short.

 

And yes I am short some of the types of businesses you describe with unethical crappy management in commodity industries trading at ridiculous prices. I'll throw out my two favorites and most recent additions of HCI and UVE, Florida Hurricane insurers that have benefited enormously from temporary favorable conditions that the market is extrapolating into infinity with lots of related party transactions auditor and CFO turnover and regulatory issues to boot.

 

The best shorts are obviously awful businesses at ridiculous prices with low borrow costs and catalysts. But I've also made money shorting "good" profitable fast growing  businesses in the past, namely specialty grocers (TFM and SFM), which have traded at absolutely insane valuations over the past few years and it was very easy to see that their growth would slow or faith in such growth would diminish and the prices would correct as they had no real moats and the market was valuing every 100 store chain like they'd get to 600 stores. But I digress.

 

Appreciate your thoughts.

 

[Uccmal]

So it appears we are arguing about the merits of shorting in general rather than whether or not TSLA is overvalued or the nature of TSLA's business.  You don't get paid a dividend, but you do get cash. Borrow is 50 bps at the moment, so no real issue there. A forced buy in is highly unlikely in a liquid $30B (on current shares stock). No one forces me to cover.

 

I have made much more money in my short investing "career" buying cheap businesses and assets than i have shorting (though i did get one 3X on puts of an obvious Chinese fraud in college lol). However, short selling is a skill i'd like to develop. A 5% position in TSLA  at $175 (and an already closed put position prior to that) was clearly a poor choice and the conventional wisdom has proven true thus far wrt shorting growth/valuation.

 

So I don't disagree with any of your points about shorting as speculation, and about your chosen style, but I guess we were talking past each other and arguing about different things.

 

I wish you luck, I have nothing against shorting stocks, but shorting great companies with excellent management and popular products on valuation alone seems like an awfully dangerous thing to do.  In the end you may be right, but there are easier, and certainly safer, ways to make money.

 

 

I have really enjoyed this thread.  The contributions and debate is top notch.  Putting value on Tesla seems next to impossible to me. 

 

I agree that it seems like a crappy short.  My experience short selling is very limited.  But if you observe successful short sellers they succeed only a handful of ways:

1) When they uncover and publicize a fraud - Muddy Waters, Jim Chanos

2) When a company turns sour.  Successful short sellers catch a falling knife on the way DOWN, not on the way up.  A good example is Nortel once it had passed its peak value and was on the way down.  RIMM was another example.  Google and Facebook are not good examples. 

3) Extreme market events - FFH shorted the Nasdaq in 1998.  CDS in 2008.  Predicting these is not easy as we have seen more recently.

 

I just dont see the short with Tesla.  They are going to make money.  They have advantages with their youth, and lack of bureaucracy.  It will take the larger companies a long time to catch them.  They have perhaps the most capable industrialist operating today at the helm.  If they grow into their valuation is 25 b a reasonable number, or 20 b.  I like my investments to have far more upside than 50%, unless they pay a big dividend.  40 b to 20 b over an unknown timeframe, with reverse dividends (borrow cost) as well does not meet my criteria. 

[blainehodder]

Understand all your points about shorting on valuation and growth and visionary companies. And for some context i own 5X as much berkshire, 2X as much CWH and ACAS and SHLD and BAM, etc (ya i own way too much Finance Insurance and Real Estate). They are far more likely to make me a lot of money than my TSLA short.

 

And yes I am short some of the types of businesses you describe with unethical crappy management in commodity industries trading at ridiculous prices. I'll throw out my two favorites and most recent additions of HCI and UVE, Florida Hurricane insurers that have benefited enormously from temporary favorable conditions that the market is extrapolating into infinity with lots of related party transactions auditor and CFO turnover and regulatory issues to boot.

 

The best shorts are obviously awful businesses at ridiculous prices with low borrow costs and catalysts. But I've also made money shorting "good" profitable fast growing  businesses in the past, namely specialty grocers (TFM and SFM), which have traded at absolutely insane valuations over the past few years and it was very easy to see that their growth would slow or faith in such growth would diminish and the prices would correct as they had no real moats and the market was valuing every 100 store chain like they'd get to 600 stores. But I digress.

 

Appreciate your thoughts.

 

Interesting you state:

 

...it was very easy to see that their growth would slow or faith in such growth would diminish

 

Do you see that happening with TSLA? If you do, do you see it happening this year or next? If we look at the "bible" timeline laid out by Eric, when do you see TSLA deviating from the gospel, causing people to question their beliefs? It seems the near term production targets for the S and X are likely to come to fruition.  Won't this just strengthen the beliefs of the flock?

[ZenaidaMacroura]

My dad took his scheduled test drive a few weeks ago.

 

This is amazing on a few levels - he's not really a car guy, and it's strange that he would be compelled to take the intiative to stray from his default brand.  He's basically driven 2 different white S-class mercs for the greater part of the decade and a half.  White because he claims that in his native country a black full-size mercedes saloon is exclusively the domain of government officials or unsavory underworld characters. 

 

But since his test drive he's been very loose lipped about the Tesla.  As I said he typically defaults to brand orientation and it's interesting that Tesla in such a short time can hold mindshare against Mercedes, Bmw, or Audi...

[thepupil]

I agree with you. The cult of Musk is far stronger than the cult of expensive produce from Fresh Market. No debate that the grocers were a better idea, better executed and made me a nice profit in the 4 trades i did in both of those.

 

Edit: And the product FAR more revolutionary, since people have been going to the market since like the dawn of man

[Liberty]

Elon Musk and his team put together the best car ever made on their first try

 

And his other company just docked with the space station, is testing re-usable rockets, and plans to send people to Mars.  I have to give thepupil some credit for having brass balls that I don't have. If I was short anything Musk was involved in, at any price, I wouldn't be able to sleep at night.

 

Yeah, not betting against Musk probably ranks somewhere along with 'Don't get involved in a land war in Asia' to me.

 

Doesn't mean the stock isn't overvalued or there won't be massive volatility both ways along the way, but definitely in the 'too hard' pile.

[Vish_ram]

What prevents Tesla from selling electric buses, trucks (like Peterbilts)? It may look farfetched now, but with improvements in technology, anything can happen.

 

Musk may venture into electric planes. You can't say sky is the limit when it comes to Musk.

[ERICOPOLY]

By the time we get close to 2020, there will be more Tesla products on the horizon, with more pie in the sky thinking.  So, will it really trade close to IV in 2020?

 

It's quite possible that people at that point won't be evaluating the stock based on 500,000 unit volume anymore.  They'll be looking at projections from the new plants they'll be opening for their pickup trucks, etc...  There will be talk of 1,000,000 volume.

 

How many models does BMW have in their lineup?  Porsche?

 

Just 3 models?  Nooo.....

 

This is no reason for me to buy it.  It's just a reason for me to not want to short it.

 

 

 

[TwoCitiesCapital]

You can't say sky is the limit when it comes to Musk.

 

No sh*t, Sherlock. He's already building rockets ;)

[Liberty]

What prevents Tesla from selling electric buses, trucks (like Peterbilts)? It may look farfetched now, but with improvements in technology, anything can happen.

 

Musk may venture into electric planes. You can't say sky is the limit when it comes to Musk.

 

I doubt they'll spend their energies designing buses, but they could definitely sell powertrain technology to other companies making all kinds of things including buses, large trucks, construction equipment, military vehicles, whatever. They already have deals with Toyota and Daimler.

 

As for electric planes, Musk said he had a design for an electric jet that could take off and land vertically. Not sure if he'll develop it himself or release the design ideas in an 'open source' way like the Hyperloop idea.

[fareastwarriors]

Tesla Convertible Debt Electrifies Long-Term Investors

 

 

http://online.wsj.com/news/articles/SB10001424052702304585004579415371025118570?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj

 

The Palo Alto, Calif., company raised $2 billion in a sale of convertible debt—bonds that can be exchanged for stock—late last week, garnering an audience of big investors such as mutual funds and hedge funds. The deal ranked as the second-biggest sale of convertible bonds in the U.S. in the past two years, according to data provider Ipreo.

 

Tesla was able to raise 25% more than originally planned. The company intends to use that money in part for construction of a $5 billion plant to build batteries crucial to expanding its business, it said.

[thepupil]

http://www.cnbc.com/id/101463960

 

Not much new or groundbreaking here, but I do like the quote that those who own Tesla are effectively betting that Tesla is the exception rather than the rule. I don't know the nuts and bolts of Goldman's study though.  Of course the opposite of that is that those shorting are betting it is not the exception and I think the consensus on here is that Elon Musk is certainly exceptional.

 

Did anyone on here buy the convertible bonds? The option is obviously worth something and Musk is monetizing short sellers need for a hedge with great effect.

 

 

 

Historically speaking, companies that fall into what Goldman Sachs labels the "super-high growth" category underperform the market over a one-, three- and five-year basis.

 

Flash-forward to the present day and investors are again fawning over names like electric luxury car manufacturer Tesla, social networking kingpin Facebook and online shopping giant Amazon, which has plenty of revenue for low or no profit, and there are some inescapable parallels.

 

"If you look back at the Internet bubble, Amazon is the exception and not the rule," Flam said. "By owning something like Tesla at a super-high multiple, you're making a bet if you will, or investing your dollar, in the exception, not the rule."

 

"Investors be warned: stocks with the highest long-term EPS growth expectations have historically underperformed the market. In the last 30 years, the median company with 30 percent consensus long-term growth has lagged the S&P 500 during the subsequent 1-, 3-, and 5-year periods. In fact, the only group of stocks that outperformed consisted of companies with negative expected long-term EPS growth."

 

"Tesla, Facebook—those are all characteristic of things that ultimately end the cycle. I just don't think they're pronounced," Paulsen said. "It's more a stepping away from the 'the world's going to end,' to 'I guess it's not.' I don't think we're seeing yet where animal spirits are really out there."

[Liberty]

Musk interview at Stanford business school from a few months ago, sorry if it's a repost:

 

[Grenville]

Musk interview at Stanford business school from a few months ago, sorry if it's a repost:

 

 

I haven't seen this one. Thanks for posting.

[Liberty]

On the rocket side, Musk wants to break into monopoly for military satellite launches, saying he could save government $1 billion/year: http://bloom.bg/1kyHzyE

[ERICOPOLY]

Illegal to directly sell product to consumers in New Jersey:

 

http://money.cnn.com/2014/03/11/autos/tesla-new-jersey-ban/index.html?iid=Lead

 

[ERICOPOLY]

Choice quote:

 

On March 6, at the Conservative Political Action Conference in Maryland, Christie had this to say: “We need to talk about the fact that we are for a free-market society that allows your effort and ingenuity to determine your success, not the cold, hard hand of the government,” as reported by Bloomberg.

 

http://www.forbes.com/sites/markrogowsky/2014/03/11/in-new-jersey-tesla-crashes-into-the-hypocrisy-of-chris-christie/?partner=yahootix