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Tesla share price most profitable US short bet: Can Musk prove bears wrong?

August has so far not been kind to Tesla [TLSA]. Its share price is down by 31% this year amid lingering worries about how the company can be profitable after reporting a wider-than-expected loss in its Q2 results. At the same time, the electric carmaker is facing increased competition from established auto companies including Jaguar [TTM], Audi and BMW [BMW].

These combining factors have likely contributed to producing yet another grim piece of news for Tesla: its shares are the most profitable short bet among US stocks, with market bears raking in gains of $2.75bn, according to data from S3 Partners, which was reported by Bloomberg.

With short sellers hoping to continue to profit from Tesla’s woes, shareholders are in a tricky position. “Being a Tesla shareholder in recent years has been one of those sensations that usually has one reaching for the travel sickness tablets,” CMC Markets analyst Michael Hewson said. 

To avoid this, should Tesla shareholders think about abandoning the stock altogether as the company faces competition from other car makers with a better track record?

 

Bears make their case

With car producers such as Jaguar, Audi and BMW planning to introduce more electric vehicles, Tesla’s competition poses some key problems as it struggles to achieve profitability. “People talk about ‘when are you going to start to see cracks in Tesla's growth?’,” said Vertical Research analyst Gordon Johnson, who’s often described as Wall Street’s biggest Tesla bear. The cracks are reflected in Tesla’s Q2 results and its share price, he said, but people are ignoring them.

“Tesla is currently being valued as a tech company,” Johnson said. “However in reality, it's a capital-intensive auto company in an industry defined by cyclicality. We believe as [Wall Street] re-rates the company lower as an auto company versus a technology company, its price-to-book ratio will trend downwards.”

When looking at the efforts traditional auto companies go to in order to stand out in the electric vehicle market, some are posing direct challenges to Tesla. For example, Jaguar recently introduced a promotional initiative that offers Tesla owners a $3,000 discount on its I-Pace electric SUV. 

“Tesla is currently being valued as a tech company ... However in reality, it's a capital-intensive auto company in an industry defined by cyclicality” - Vertical Research analyst Gordon Johnson

Audi has plans to introduce an electric version of its Q2 model to specifically target the Chinese market, where Tesla is building its Gigafactory 3. Increased competition has led BMW to speed up plans to introduce up to 23 new fully electric models by 2023 instead of 2025.

Other analysts have said Tesla probably won’t be able to maintain its premium valuation in the future. Considering the competition facing the company “and the fact that other metrics such as gross margin/vehicle do not appear to warrant such a premium, I believe Tesla is a good ‘short’ candidate,” analyst Frank Hacklander said.

 

Trying to remain positive 

Tesla’s disappointing Q2 results and the recent short bet news among US stocks are surely making a number of shareholders consider their company positions. Although some commentators have noted Tesla’s problems are more related to how CEO Elon Musk’s pronouncements often don’t match reality, they can’t ignore the numbers entirely.

 

Market cap $39.34bn
Forward P/E 57.79
EPS (TTM) -3.85
Return on Equity (TTM) -9.54%

Tesla share price vitals, Yahoo finance, 15 August 2019

 

Of the 32 analysts covering Tesla stock, the average recommendation and price target are ‘hold’ and $264.08 respectively, according to Marketwatch. By the middle of this week, the share price was trading around $229, with a 52-week low of $176.99.

Tesla’s recent results showed that operating performance looks more positive, Hargreaves Lansdown’s Nicholas Hyett said. “With the shares down from $310 at the start of the year, the valuation, while still high, is certainly better. 

“Throw in an operating plan that seems to be delivering results and it's tempting to turn positive on Tesla. However, given the up-and-down nature of recent quarters, we remain cautious for now.”

In response to Musk’s reiteration last month of full-year delivery forecasts, RBC analyst Joseph Spak said he doesn’t think revenue in the next two quarters will increase from either Q2 levels or on a year-on-year basis: “In fact, we don’t see revenue returning to near second-quarter levels until the third quarter of 2020. So, growth is likely to be on hiatus and we don’t believe the valuation reflects this.”

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