Betting Against Tesla


When you bet against Tesla and Elon Musk, you had better bet small and that is just what I am doing. I am a veteran speculator with more than forty years in this racket. For the last two years, I have hesitated against shorting this stock because of my awe of Elon Musk and his achievements. Since Elon arrived in this country from South Africa with almost nothing his career has been one stunning triumph after another. He started out as a founder of Zip2 and sold out for $22 million. He then became a cofounder of Paypall and cashed out for $165 million. In rapid succession, he then became a cofounder of SpaceX, Solarcity and Tesla. Solarcity is now the nation’s largest provider of solar power systems. If I were asked to vote for America’s greatest living entrepreneur, I would vote for Elon Musk.

Why then am I betting against the storied Tesla his most famous creation? I am betting against it because the numbers are nuts and I am not the only hard-nosed investor to come to this conclusion.

In the last three years, Tesla has been one of the market’s most heavily shorted stocks. In 2014, the shorts were taken out and shot as Tesla skyrocketed in price and the shorts frantically covered their positions. In spite of this carnage, the short position is still a very high number about 25% of Tesla’s total stock float. Why do the shorts continue to short this stock in spite of the fact that they are getting killed? It is because they are looking at the numbers, which are truly awful. Tesla is currently selling for $267 a share and contrary to popular belief, it has never earned a profit. In its last quarterly financial statement, it reported a loss of $62 million or fifty cents a share when using official GAAP (Generally Accepted Accounting Principals) numbers. These are the only numbers that are recognized by the SEC. The hysterically hailed $16 million profit and earnings of 11 cents a share were bogus non-GAAP numbers. Why the SEC allows companies to publish fantasy non-GAAP numbers in their earnings statements is beyond me but they do. What is even worse is that so-called professional investors keep quoting these bogus numbers on TV as if they were valid.

Tesla is perceived as an infallible company destined to revolutionize the car industry. Tesla needs stunning performance results to justify its current price. It is disturbing that it is now producing about 35,000 of its highly acclaimed cars a year and is selling them at an average cost of about $100,000 each and it still can’t earn a profit. It has already announced that it does not expect to earn a profit in 2014 using official GAAP figures.

The $64,000 question is how many green zealots are there out there who are willing and more importantly able to pay $100,000 for an electric car with its very real range limitations. The zealots say hundreds of thousands. I think not. Signs are beginning to appear that Tesla is struggling to find 35,000 buyers a year. Buyers who can afford to pay $100,000 for a car don’t grow on trees. Where are the 35,000+ annual buyers next year and the year after that coming from? What finally drove me over the edge were the repeated assertions by proud Tesla owners who resemble nothing so much as a religious cult that there were hundreds of thousands of panting new buyers out there. Buyers who will gladly pay $100,000 so that they can be driven into a state of ecstasy every time they floor the accelerator because Tesla can accelerate from 0-30. I don’t know what that means. I do know that I would not pay a dime extra for this exalted performance. If this is the best argument that they can come up with then they have no argument.

My Honda Accord cost me $22,500 and gives me all the acceleration that I want or need.

Elon Musk is a riverboat gambler. His entire career since he came to this country has been one riverboat gamble after another. This is a guy who is not happy unless he is rolling the dice. Tesla wasn’t risky enough for him so he upped the ante and built the supercharger network with free refueling for life to wild applause. Everybody seems to assume that it is a slam-dunk and that it will be profitable. What if it isn’t?

Then he bet the ranch. The gigafactory is a bet the ranch gamble. It is a huge gamble for a company that has never earned a profit and is bleeding red ink. It almost has to be profitable from day one. What if it isn’t?

Betting the ranch on the gigafactory wasn’t enough for our boy. He decided he still wasn’t taking on enough risk. So he bet the ranch a second time on a warranty program that can only be described as insane. No car company is history has offered a warranty program that remotely compares with it. Tesla is offering an eight-year warranty program on both the drive train and the batteries and a warranty of infinity on the mileage. There is also a three-year warranty on trade-ins at 50%.

The long-term effects of aging on Tesla are unknown. No one knows how the battery and drive train are going to perform in year three. Let alone years six, seven and eight. The excuse given for this warranty is that since the car does not have an internal combustion engine nothing serious can go wrong with it. How anyone can believe this is beyond me. Edmunds has refused to recommend the car because too many things have gone wrong with its test vehicle. This is not good. If the Tesla sedan does not age almost perfectly the warranty program alone will crush the company like a bug.

In the gambling world, there is a term for gamblers who keep betting the ranch. They are called bridge jumpers because they keep on betting the ranch until they lose everything. After that, there is nothing left for them to do but jump off a bridge.

I said that when you bet against Elon Musk you had better bet small and I am betting small. My bet is a very modest seven $80 puts that expire in January 2016. After all, if anyone can pull this off it is Elon Musk but I don’t think so. Tesla is priced for perfection and perfection isn’t going to happen. Far too many high-risk events have to go perfectly for Tesla to just maintain its current exalted price let alone increase it.

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