A Bad Month For Tesla Bears

If you’ve been following the market lately, you certainly know that stock in Tesla has soared to new heights, delighting the bulls and horrifying the bears.  But the battle between them is far from over. 

The point of contention is simple: Should Tesla be valued as an auto maker, a growth company, a high tech, or a play on the environment?   Depending on the answer, Tesla’s shares are still a good buy, wildly overpriced, or of interest only to long-term investors.  Meanwhile, as Wall Street wrestles with these questions, Tesla’s stock is on a roller coaster ride.

One imagines that Tesla should be everyone’s darling.  After all, it has outmaneuvered much larger rivals, makes environmentally friendly electric vehicles, and is cutting costs to put them within reach of the average Joe.    

Love-Hate Relationships

But Tesla is not that, and without exaggeration, many people hate this company.  Among them: gas station owners, rival auto makers, blue- and white- collar workers, mechanics, ad agencies, and truck drivers. 

And that’s not all.  Unlike other auto makers, Tesla uses direct sales, which challenges traditional dealer networks; they, too, are not fans.  In 2015 the company introduced a line of batteries that serve as energy storage systems for homes and businesses; over time these could challenge local power companies – in other words, yet another foe.  And new products in the works, such as driverless taxis and vehicles, add growth potential, but they, too. make enemies. 

Analysts who rated the stock overpriced were proven wrong repeatedly; those who forecast a higher stock price also were proven wrong because the stock surged far above their target prices.  And the media often focuses on the company’s negatives and ignores potential growth prospects.  Without a doubt, Tesla has become the company many love to hate. 

Disappointing developments and concerns about safety issues drove shares down to 179 last June.  At that time, Elon Musk, the founder and CEO, tweeted bullish comments and borrowed money to buy more shares; soon afterward the stock reversed direction and began a violent uptrend. 

Bad News For Bears

By February 2020, the price made an all-time high of 969 – a gain of more than 400 percent in nine months and more than 200 percent since the beginning of the year.  At recent prices, Tesla is the most valuable auto company in market history, and its market value is more than that of GM, Ford, and Fiat Chrysler combined.   

Bears who sold short lost more than $8.4 billion in the first six weeks of 2020.  Bulls, on the other hand, cleaned up.  Call (bullish) options on Tesla that were trading at $6 on January 30 soared.   According to Trade Alert, less than two weeks later they were trading at more than 300 times that price.  

Bears, believing shares were drastically overpriced, shorted the stock heavily and paid dearly for that mistake. Here’s how the Wall Street Journal described what had happened.  “Tesla shares remained buoyant even as the electric-car manufacturer racked up billions of dollars in annual losses.  Their pain has suddenly gone from chronic to acute as Tesla shares have soared to heights that few of its supporters would have ventured to predict.  Last year, (bears) lost $2.9 billion betting against Tesla.  In the first week of February alone, they lost another $2.4 billion as Tesla shares posted a string of multi-billion dollar daily gains, according to data from S3 Partners.”

As shares moved higher, bears who had sold short began losing money, and some of them threw in the towel and bought shares back.  This buying pressure drove the stock still higher, forcing other bears to close their positions and buy the stock.  This pattern repeated itself frequently.

Pessimism Persists

So, where does Tesla go from here?  At the moment, the stock is dramatically higher than it was at the start of the year.  However, the debate continues over whether Tesla is a high tech that deserves its current high valuation or an auto company that does not.

As a group, Wall Street is pessimistic about Tesla’s stock.  Nearly half of the analysts that follow the company have a sell rating on it, and only 19 percent grade Tesla’s stock “buy.”

But not everyone is pessimistic.  Bulls believe that Tesla will continue to innovate, that sales will continue to increase, and that at some point huge profits will be realized.  Some are hoping that the company will use its now richly priced stock to further expand its business or to make acquisitions.  

Bullish investor Douglas E., an attorney who owns several hundred shares of Tesla, said “Tesla is really a technology company that will have a profound effect on the price of oil and gas and reduce carbon emissions.”  Douglas believes one day Tesla will be the largest company in the world.  One money fund manager forecast that Tesla›s stock would reach $7,000 within five years.

But some bears remain pessimistic.  According to the Journal, John Goetz, president and co-chief investment officer of Pzena Investment Management, said one reason his firm has built a big stake in Volkswagen is his belief that it – and not Tesla – will become the main player in electric vehicles. 

“Volkswagen will introduce more models over the next three years than Tesla ever will,” said Goetz. However, so far in 2020, Volkswagen’s shares have declined, while Tesla’s have soared. 

James Chanos, head of the Kynikos Associates hedge fund and possibly Wall Street’s most famous short seller, thinks other auto companies will catch up with Tesla innovations.  “This is a car company, a higher-end one, but still a car company, with the same low margins of other auto makers,” he said.  Chanos said that he would continue to short Tesla despite the big losses he has suffered.  

Chanos and the other bears recently got more bad news.  On Thursday, February 13, Tesla announced that it would sell over $2 billion worth of additional shares.  Musk said he would purchase an additional $10 million worth of stock, and board member Larry Ellison said he would buy shares worth $1 million.  This news drove shares of Tesla up nearly 37 points – the last thing the already battered bears wanted to hear. 

The last nine months have been a nightmare for Tesla bears.  Many of them have learned a painful lesson about how risky short selling is – even when it looks like a sure bet.  Savvy investors should pay heed to this lesson.

sources: bloomberg.com; cnbc.com; investopedia.com; yahoofinance.com; wsj.com.