Tesla TSLA Sell (Short) Rationale - is it in need of a proper Charge?

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THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY. SHORTING INDIVIDUAL STOCKS IS VERY HIGH RISK.

You may have spotted that I Shorted Tesla TSLA via a Spreadbet yesterday at 22537 ($225.37) - please see my ‘Trades’ page for specific Trade details. This won’t be a long blog, I just wanted to outline the main reasons for my Short and a few other points worth noting.

The ‘Sell’ case:

• Up until now TSLA has not faced any serious competition in the Electric-only Car Market and TSLA has been focused on a very top-end niche. The irony is that the established Major Car Makers were probably sat on the sidelines watching TSLA closely and letting TSLA create the Market for them, before they move in and take it off TSLA’s hands.
• Existing customers are Eco-Warrior types and evangelistic about the TSLA Cars - however, this emotional connection is masking huge reliability issues which will just not be put up with by Mainstream Buyers - modern Cars are so supremely reliable that any problems will be unacceptable. For instance, I heard on Bloomberg TV recently that 80% of Model S Cars have had their Drive Trains replaced - that is a shocking statistic - imagine the fuss if someone like Ford had to replace 80% of the Engines/Gearboxes in all Focus models sold !! On that Reliability theme, I read this week that TSLA were BOTTOM of a recent JD Power Survey with something like 57 Makers in it. Shocking and unacceptable.
• I recently read something which claimed that on a GAAP Accounting basis, TSLA is losing $18,000 on every Model S it sells. These things are very pricey at over $80,000 or so but the new Model 3 is supposed to be $35,000 - how on earth will TSLA be able to make money on that? This is a huge problem for TSLA because it means that the more Cars they sell, the more Money they lose - clearly this is an unsustainable Business Model. The usual Model for manufacturers is that each subsequent Item produced is marginally cheaper - this leads to Economies of Scale obviously. TSLA has ‘Dis-Economies of Scale’.
• The Company is valued at around $34 BILLION - this is for a loss making Company that is about to face a huge spike in Competition for its products. Utter insanity. I struggle to see how this could even be worth $10 billion - if I am right, then the Share Price should be under $100.
• TSLA has an awful record of over-promising and under-delivering. In early April 2016 they unveiled the Model 3 and say it will be available in late 2017 and they have taken something like 260,000 Deposits in advance - with the record of delays on the Model S, it is extremely unlikely that they will make this Deadline.
• I heard something on Bloomberg the other night which said that in 2014 or something there were 4 pure Electric Cars available in the US - by 2017 there will be 59 - in other words, TSLA is about to face a tsunami of Competitors - and it is obvious some may be better than the Model 3. I have heard ‘Experts’ saying that the traditional Car Makers have been slow in moving to Electric Vehicles but I suspect the real truth is that they have been sitting back and watching TSLA create the Market for them - pretty damn shrewd. There are even rumours around that Apple are working on an Electric Car - if this is true, then I suspect many potential TSLA buyers will be preferring an Apple Car as Apple has extremely high Brand Loyalty.
• There is an assumption within the TSLA world and its supporters that Electric Cars will dominate. However, I am not convinced - in Japan there is a big drive towards Hydrogen Fuel Cells with a big investment in infrastructure (Pumps etc.) by the Japanese Government. As a result, the major Japanese Car Makers like Mazda, Toyota, Honda, Nissan, all have Hydrogen models either already released or due very soon. This will be a test-bed for a Hydrogen powered transport market and it is most likely something the ‘Big Oil’ Companies like Shell, BP, Total, Chevron etc. will want to be part of - the electric world does not suit them at all and I bet they will try to resist it. I also read an Interview with the Boss of Honda in a recent ‘Autocar’ or similar mag and he said that he saw Hybrid Cars and Batteries as a ‘stop-gap’ until Hydrogen becomes the dominant technology.
• Range is the big issue on Electric-only Cars and TSLA claim that the Model 3 can do 200 miles before needing a charge - however, they also claim that it can do 0-60 mph in about 6 seconds - but you can’t have both - if you use the amazing Power/Torque that Electric Cars have then they soon burn up the Range. The new Chevrolet Bolt which is already available I think, has a Range of 230 miles - so the Model 3 is already lagging and you can’t even buy one for probably a couple of years. Another surprising thing I learnt recently was that the Battery Pack of a Model 3 is heavier than that in the Bolt - I thought these TSLA Cars were supposed to be really innovative?
• After recent Results, I read somewhere that TSLA has $1200m in Cash but is burning $800m a year in Losses at the current level of Production - remember, when they start producing a higher volume, they will lose more Money. Clearly there is a need for more Cash and this must mean either more Debt and/or the issue of more Equity - bad for Shareholders however you cut it. In all seriousness, if the Losses continue (looks like they will) then there must be a huge likelihood of breaching Banking Covenants etc. It will be ugly.
• Many people argue that TSLA should be on a high Valuation because it is an ‘Innovative Unicorn Tech Stock’ or some nonsense like this. The big issue here is that TSLA has made all its Patents and Know-how available to share via the Web - showing their ‘Social Conscience’ and all that but it means the Company has no Intellectual Property to speak of - anyone can just copy them.
• Elon Musk has stated that it is his aim to introduce Electric Cars for the good of the World - this is all very honourable etc., but it seems pretty unethical to fool Investors into buying Shares/Bonds which will quite probably be worth very little.
• There seems to be a Cult around Elon Musk where he can do no wrong etc. - this God-like status is rather odd when you consider what he has actually achieved in terms of Profit - as far as I can tell he has only made money from Paypal PYPL and everything else is hype. Don’t be fooled.
• It has recently been in the news about how the price of Lithium (which is used to make the batteries) has been rising strongly. Obviously as this rises, the costs to TSLA increase - they aren’t able to make money on the Cars now, so this only makes the problem worse.
• I read somewhere that questions were raised in the US Government about Elon Musk’s financial practices - using Stock from one company (e.g. SpaceX which is in effect government funded) to guarantee Loans to other companies such as TSLA - this is very suspect.

Understanding the Spreadbet Exposure
A mate DM’d me on Twitter about how you work out the Exposure on this bet - it can be a little confusing, so I thought it would be worth clarifying here for Readers.

As with any Spreadbet, the easiest way to think about it is to imagine what your Exposure would be if you bet ‘£1 a Point’ on it. In the case of my Bet, at 22537 (this would be $225.37 in the ‘real’ market), if you bet at £1 a Point then the Exposure would be £22,537.

The Minimum Bet Level on igIndex is ‘£0.1 per Point’ - so this would be equivalent to Exposure of £2,253.

As another example, if you did ‘£8 a Point’ then your Exposure would be £180,296 (£8 times 22537).

If you did ‘£0.4 per Point’ then your Exposure would be £9,014.

The Margin (or Deposit if you like) requirement is 10% of Exposure - so on my last example, the Margin would be £901. As a ‘Top Tip’, when you enter your details of a Trade into the Dealing Screen on the App (I never use the Laptop method so not sure if this is similar - but it probably is), it will tell you (in admittedly crazy tiny writing) exactly what the Margin requirement is - if you see this figure is huge, then you have probably misunderstood how the Exposure is calculated - CANCEL THE DEAL IMMEDIATELY AND WORK OUT WHERE YOU HAVE GOT IT WRONG !!!

Technicals
If you regularly keep up with my scribblings, you will probably know that I have been itching to Short TSLA for ages but the Charts were not giving me a decent enough ‘Sell Signal’ to put the Trade on. However, with the Brexit Fears spooking the Markets in recent days, the Price looks to be coming off and I thought it was time to get a Position initiated.

Let’s kick off with the Longer Term View (always Best Practice with Charting) and look at my Screenshot from ShareScope below which goes back 3 Years ish. It is clear that for all of 2013 and much of 2014, TSLA was in a strong Uptrend but since that it has done wide swings in a sort-of Sideways fashion - it is very messy really.

Note the Peak at $290 and a Breakout above this would have me activating a ‘Stoploss’ and closing my Position at a Loss and you should be able to see other Peaks that will be strong Resistance.

Note how the 200 Day Moving Average (which is the Light Blue Wavy Line - not the ‘fast’ one, the ‘slow’ one) went Up strongly for half the Chart and since that it has levelled off and gone Sideways really - again the 200 Day MA is showing us the Trend even if we are unable to draw the Channels on the Price Line.

My Yellow Circle is highlighting where the 50 Day Moving Average has crossed the 200 Day Moving Average from underneath and done a Bullish ‘Golden Cross’ - being an Evil Shorter, this is not something I want to see but I suspect we will get a ‘Dead Cross’ soon.

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My Chart below zooms in to show the Daily Candles over 2016 so far and a bit of last Year. My Green Arrow is pointing to a lovely ‘Inverted Hammer’ Candle which was generated on Wednesday 8th June 2016 and in the context of a Run-up for about 3 Weeks, this looked like a great Sell Signal.

On the next day we got a Big Down Candle which ‘Confirmed’ the Inverted Hammer - so it was game on for the Short and that is pretty much why I banged it on. 

In terms of Targets, I expect it could fall to $205 or maybe $200 which would be a psychological Support Level where Buyers might come in. I will play it by ear but chances are I will close this Position around the time of the Brexit Vote and just grab a small Profit out of it and I will be looking to Short TSLA again in the future - as it is unbelievably over-valued.

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Tactics
I am happy to let this Bet run as it may take some time for it to play out as I would like - over valued ‘Story’ Stocks can stay that way for ages and keep going up even though the whole thing is clearly daft. However, there is a very Strong Resistance Level up near $290 (i.e. 29000 on the Spreadbets) and it is only if it goes over this level that I would get worried and Close out the Short - so that is where my Stoploss is.

However, if the Trade does go against me (so far it is doing very nicely !!) then I am happy to add a little more Short and in effect ‘Average Down’ (although of course I will be ‘Averaging Up’ because this is a Short). I currently have about 1% of Portfolio Value in the Position and I am happy to double this if I need to - but any Shorts on Individual Stocks are High Risk and I will not get carried away and do a Big Position. .

However, I will most likely not treat this as a Long Term thing and I will be tactical and short termist if a reasonable Profit arises in coming Weeks - with Markets likely to be pretty rough around the Brexit Vote, then I might be able to sneak out with a nice quick Profit and I can then play the same Trick again in the future - TSLA is clearly a joke but it will take quite a while for reality to hit the gullible masses. Elon is God and that is it as far as they are concerned.

Something that could derail me is when they actually open the new Battery ‘Giga-Factory’ - this might cause the Price to Spike up but to an extent it is probably priced in already and I doubt it would go over $290 in any event. Of course, a big advantage of Shorting over-valued stuff like this is that there is no Dividend for me to pay and very little chance of it being taken-over, which can be a Killer if you are Short on a Stock.

Anyway, it would be nice if I can snaffle some Dosh out of this Hyped-up Bubble Stock. In part I am doing this for a bit of ‘fun’ and to nab some Beer Money out of the Market and pickpocket old Musky.

Cheers, WD.