Recently I have been seeing a lot of crazy things being said about Tesla (TSLA - Free Report) . Sure this is a battleground stock with a massive 31% short interest position, so it makes sense that a lot of people that are short are trying to persuade stockholders to sell and prospective buyers to look elsewhere.
The most comical event of late came from Vilas Capital’s CEO who proclaimed that the company would go bankrupt in the next 3 to 6 months. Of course, John Thompson made this hysterical assertion after he purchased puts, and noted in his shareholder letter that his fund would greatly benefit if a fall in share price happened sooner rather than later.
On The Verge Of Bankruptcy?
CEO John Thompson then went on a fast media campaign and talked about TSLA suppliers abandoning the company. He mentioned Goodyear Tire, whom he suggested had a 2% margin on the tires they sell. His example of the company selling TSLA $100M of tires to make $2M implied a risk of $100M (which would occur if TSLA accepted all the tires they would use for the year upfront – which is pretty illogical) because the company might not pay its bills.
Thompson talked about how the company was recently downgraded by a credit rating agency – those same outfits that gave a big heads up just prior to the great recession that credit default swaps and other financial instruments with even small degrees of complexity were nothing to worry about. But one has to wonder if the CFA bothered to take a look at the cash position of TSLA?
Zacks Investment Research has a great tool that can help give a quick reality check on the situation. Research Wizard can help me chart tons of data points that CFAs and non-CFAs alike can learn from. Let’s see how Research Wizard shows the cash position for TSLA:
At the time when Thompson opined on the likely bankruptcy for TSLA, he would have seen a cash position of $3.5B – and that number has not slipped to $0 as the bears would have you believe. Instead, the cash position fell to $2.7B in the most recent quarter.
Simple math tells you that they burn rate was $800M in the quarter. That is a lot! But one has to wonder, where did it all go? Maybe it was building out a Gigafactory or making some cars or something like that… how about we look at total assets and see how they are doing:
Now I am not suggesting that the $27B in assets should be the reason you buy the stock, I am just suggesting that the probability of a bankruptcy in the next few months is awfully far-fetched.
The two charts of total cash and assets may serve to disprove the thesis that bankruptcy is imminent, but there has been a chart that I am seeing more and more lately.
The last few times I have stepped up to present the bull case for TSLA I have seen this type of chart come back at me. This is the most recent one from a blogger:
It is hard to take this sort of thing as anything short of condescending… giving me a “pro tip” – especially seeing as the author isn’t a CFA. Instead, it came from a blogger, but I do have to admit he is a better blogger than me.
The idea that this
short (I mean) chart (if the blogger actually has any position) presents is that ever-increasing losses are a bad thing. And that is true, but investors tend to buy stocks based on what they WILL do, not what they have done. This is a pretty basic premise that most investors understand, but for those that don’t I just gave you a real “pro tip.”
With that in mind it is a good idea to “look forward” when talking about an investment. On Friday I posted on Twitter a screenshot from the “detailed estimates” page from the Zacks.com site. Here is the screen shot:
The point of this was to show that the company is expected to be profitable next year. Of course, this really isn’t that big of a surprise because we heard that the company expects to be cash flow breakeven in the second half of this year.
We have heard from many shorts that they will remain short until the company is profitable. Well guess what… some covering trades are on the horizon!
Speaking of looking forward, one key idea is to look at where analysts are expecting future sales to come in.
It stands to reason that increased sales will lead to increased earnings and that is a fundamental driver of the stock market.
Let’s look at how the next fiscal year sales estimates have moved over the years for TSLA:
This chart shows how the consensus sales estimate for TSLA has trended over the last few years. You can see big jumps higher… that is what happens when the analysts from Morgan Stanley, Goldman Sachs or places like Bernstein change their estimates.
It stands to reason that as TSLA makes and sells more cars, this revenue number will also increase. For some reason, the bears on TSLA don’t see the obvious truth that sales for the Model 3 and other cars are increasing.
Bloomberg has even gone so far to produce a website that is focused on Model 3 production rates. Let’s take a look something that will scare the pants off the shorts:
It is pretty hard to spin that Model 3 production chart and the weekly production rate as a negative… but I am sure the bears will find a way. A recent trend on Twitter is to screenshot something and look back at it in 6 months and ask if that idea “aged well” or not.
The question becomes do you believe that Model 3 production will increase or decrease?
We all remember the day that TSLA started taking reservations for a car that would not be ready for a year or two, right? I think this picture sort of captured some ofthe enthusiasm that consumers had for the car:
Now try to picture what that line will look like when Model Y reservations are being made. Do you think it will be larger or smaller?
The key idea that drives businesses, in general, is DEMAND. Is there demand for your goods or services? If so, then things could work out. If there isn’t, well then there will be issues.
It has been a long time since I heard the valuation for TSLA is crazy. Mr. Thompson, CFA noted that he has “never seen anything so absurd in my career” when speaking to the TSLA valuation compared to Ford. Some would wonder how his career missed out on frauds like Enron, Refco or Worldcom and where they would rank on his personal scale of absurdity.
Now that earnings are right around the corner, PE is starting to get some more chatter. Since the company is still posting losses, we cannot use PE on a trailing basis just yet. Of course, there is already a valuation metric that we can use. It is called price to sales, and this is not a chart the bears want you to see:
Using the price to sales metric is something that we fall back to when there are not earnings. But here is the key idea, the valuation has become more and more reasonable considering the growth over the last 5 years.
Price to sales may be a little more aggressive way to value the company but there are other measures we can use. Take a look at the price to book multiple and how it has trended over the last 5 years.
I also used the Research Wizard screener to look at how many stocks had a higher price to sales and price to book multiples.
As of May 20, 2018 there are 510 stocks with a price to book multiple that is greater than 9x (TSLA multiple is 8.8x). There are 1,370 stocks that have a price to sales of 4x or greater (TSLA multiple is 3.8x).
But of course it is silly to judge TSLA against ALL stocks… maybe we should just look at F and GM.
Here is the price to sales chart for F, and you can see that it has not been higher than 0.56x over the past 10 years.
GM isn’t much better, not getting over 0.46x over the last ten years.
Now you might be saying those are a much lower price to sales, isn’t that a good thing? Isn’t that a better valuation? The quick answer is that it is a matter of perspective. A very low price to sales, or a multiple of less than 1x means that market doesn’t really value your sales all that highly.
In the case of GM and F, it could have something to do with their growth rates. The simple fact is that market does not value them highly for their sales.
Maybe this article helped you understand why a CFA would say that a company that is obviously not going bankrupt is headed for just that disaster. He was short, and he profited from the fall in the stock. He said what he had to in order to make his position as profitable as possible.
Bloggers and random tweeters can tell you the sky is falling that people are leaving their jobs at TSLA or that the death rates are higher for drivers of TSLA cars. They often have a monetary motive.
Whether a CFA is short AMZN or a blogger is short HLF, I say let them be short. Those moves didn’t work out and I prefer them to be short while I am long TSLA.
Disclosure: The author of this article owns Tesla (TSLA - Free Report) in his trading and retirement accounts.