This might be the most obvious short idea in our Model Portfolio. We have been recommending shorting Tesla since October 2017 when it hit an average selling price of around $350 per share. More outspoken and famous investors have extensively been writing about why Tesla is a short candidate and I will save you from the usual rant. But here are our reasons to short Tesla:
Two Main Reasons to Short Tesla in March 2018
Tesla’s woes are not over yet and we believe the stock price has still a long way to go down. For that you need to focus on only two factors:
(1) Continuous delays and production challenges for the Model 3 series.
(2) The recent downgrade by Moody’s on Tesla’s high yield bonds.
The logic behind this short candidate is rather simple: If they can’t sell more Model 3s to at least lessen the strain of their continuous cash burn rate, their financing and refinancing cost must go up.
If their interest payment commitments increase further (as it just did thanks to Moody’s downgrade), this will put additional strain on their finances, as more cash will be eaten up to servicing outstanding debt.
If finances are in question, suppliers and business partners will scrutinize payments and credit lines much more carefully, putting further strain on Tesla’s liquidity situation. It didn’t help to merge de facto bankrupt SolarCity into Tesla’s financial structure, as it now has become a serious liability risking both entities.
The logical consequence must be much lower valuations with a possible doomsday scenario further down the months as some short punters have been suggesting. That being said, we disagree with such an Enron-type scenario as they would sell themselves to a large car manufacturer or even a global tech company.
For now, Tesla is facing a financial uphill struggle and to reflect this a new price reality will have to set in.
You might have read a lot about Tesla but the two points above are all you need to focus on right now. All the remaining newsflow – flamethrowers, shooting a Tesla into space, tug-of-war demonstrations and electric semi-trucks soon conquering our highways— is all just noise.
Less well publicized is the firing of 700 people in the key areas of the Model 3 production line, a generally disgruntled workforce with plenty of whistleblowers, and batteries that just won’t work according to Tesla’s wishes.
This is certainly not an easy company to short, but the constant ups and downs offer plenty of shorting opportunities and profit opportunities
Disclaimer: Short position since July 2017