Tesla shorts: please read!

I am writing this because in 2013 I had several friends that lost money shorting Tesla while I made off like a bandit. I assume most people negative on Tesla are shorts, trying to make money off the volatility, and I can respect that. But if you listen to the pundits and you are a long term short… you are running a huge risk. I have written extensively about why I think Tesla is very likely to be successful long term, but here are some common short seller thesis’s and some facts I urge you to consider.

Tesla loses money on every car they sell
This is an often repeated media trope that is misleading. It makes it sound like they would lose more money if they sold more cars. That is not true. Tesla has positive gross margins.

Tesla is investing in future production and that is part of why it is losing money. I would also draw your attention to a strange fact about GAAP accounting principles. Some investments like the GigaFactory are depreciated and the expense is spread over the lifetime of the operation of the factory. However, R&D, although it’s an upfront cost that pays off over the long term, is not depreciated. You take the full charge in the quarter the money was spent. I suspect it’s because R&D has a less predictable payoff and timeframe than an investment in a hard asset like a factory.

Another factor in Tesla’s lack of profitability is their high sales expenses (SG&A). Currently SG&A is about 20% of non-gaap revenue. At most auto companies it’s about 10%. The number of Model 3 preorders indicates that their current sales infrastructure is scalable and can support much larger revenues. At scale SG&A is likely to be a lower percent of revenue.

Senior executives are leaving
Many shorts think it’s a bad sign when senior executives leave. In high growth companies people get burned out and their job often outgrows their capacity to perform. I would be worried if they weren’t being replaced by more seasoned automotive executives.

Tesla has quality and reliability issues
Consumer reports ran an article about Tesla reliability issues. The issue is largely addressed by Elon Musk himself.

Tesla is a company that operates in a way that would be risky for larger auto manufacturers. Typically they get the first models out on aggressive timeline and fix problems in the early production models. Because they produce so few cars, have early adopters as a client base, and fix the problems they have gotten away with this.

Tesla often fails to meet expectations
Tesla consistently has marginal misses in the short term, but just as consistently makes highly ambitious forecasts. By time they miss people tend to forget the expectations were ludicrous to begin with. Most companies play games with under promise and over deliver. Tesla has never been accused of under promising.

Tesla’s non-gaap accounting is a scam
Tesla releases non-gaap accounting numbers. It makes it easier to comp them to other auto manufacturers. Here is an in depth article, but in short the numbers can be trusted if Tesla’s retain value, which they are. The resale value guarantee program is the root of the issue. I presume at some point the program will be discontinued as it outlives it’s usefulness and will be curious to see if it’s extended to the Model 3.

The crazy stuff
These are mostly arguments that seem like they might make sense on the surface, but really don’t hold up after in depth analysis. But there is a dearth of really crazy arguments out there. I want to end with one that is particularly amusing. One short seller asserted “The market is under the mistaken impression that it has significant & sustainable proprietary technology when it doesn’t.” I completely disagree, but this one blows my mind. Tesla was created on the premise that a compelling electric car could be built using no new technology. The cars are built using laptop battery cells. The fact that the entire premise of the company’s existence is an actual argument for short sellers… it boggles my mind how much people don’t understand this company.

Check out Tesla news feed.

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