Time Short For Tesla Shorts?

| About: Tesla Motors (TSLA)

The January/February 2008 issue of Stanford Magazine carried the following two paragraphs as part of an article on the new electric car company, Tesla Motors (NASDAQ:TSLA):

"The startup's brash ambitions make some industry observers scoff. "I wouldn't call it Tesla Motors yet. I would call it the Tesla prototype company," says James Hall, vice president of industry consulting firm AutoPacific, in Southfield, Mich. "My concern is that there are people in charge who don't have a realistic view of the car industry."

Hall estimates Tesla will need 30 to 40 years to turn a profit and $700 million immediately to successfully develop and mass produce a lower-priced model. Traditional automakers typically spend between $500 million and $1 billion to put out a new car-and that's without building a company from scratch first." [emphasis added]

Not so long ago, before the Tesla IPO, very sober, knowledgeable auto industry experts knew that Tesla was doomed. People with decades of actual experience in this industry knew that Tesla was a disaster waiting to happen...

Last Fall, John Peterson knew Tesla was in trouble when he wrote, "At the risk of sounding cruel, Tesla was a bug in search of a windshield on Sept. 30."

Two months ago, analyst Graeme Kreindler knew uncertainty lay ahead and wrote, "...Tesla's future stability is questionable."

Sober investors shorted lots of Tesla shares based on these and similar reports. Many are still short Tesla shares. But the times are changing for Tesla, and not all things are as some people once knew them to be.

In June of last year, Tesla shipped its first Model S cars, ahead of schedule. Those "people in charge who don't have a realistic view of the car industry" that James Hall knew all about, won Car of the Year from Yahoo, and from Automobile Magazine and from Motor Trend. They did so with their first in-house car design, built on the first production line they ever implemented, before their 500th car had rolled out the door. Road & Track magazine said simply of Tesla's Model S, "It's the most important car America has made in an entire lifetime." And a lot of people who shorted Tesla knew none of this would ever happen.

Late in the evening of March 31, Tesla announced a profit, on both a non-GAAP and a GAPP basis for Q1. It took Tesla five years to become profitable, not the 30-40 years industry experts knew it would take.

The market barely noticed Tesla building its Model S on time, or Tesla winning auto industry acclaim for this great car. But boy oh boy did the market notice when Tesla became profitable. What had been a stubborn upside resistance at $40 is now the floor. This "new reality" for Tesla shares was driven by ~10 x normal volume, and even after an expected pullback following the breakout, both volumes and price have been bullish in recent sessions.

Things To Come

It is, of course, the future that matters. The past can only be a guide, and not ever a guarantee. While Tesla has accomplished a great many admirable, even amazing things, one can still imagine any number of bad things in Tesla's future that could kill this fledgling car maker.

Some insidious defect could require a financially devastating Tesla recall. Tea Party Republicans could take over Government, eliminate EV subsidies and give Americans all the $2 gas their SUVs can burn. And speaking of burning, battery fires may not, in fact be restricted to laptops and Boeing jets.

Of course, the market has to balance these and other Tesla risks against how this company is actually doing and what progress it is likely to make in coming quarters. The European market should see first customer deliveries of the Model S this summer. Tesla's SuperCharger network is likely to go on expanding. The Model S production rate, at 500 units a week, already exceeds Tesla's guidance for all of 2013. These things are not wild speculation, just simple extrapolation of Tesla's demonstrated, competent execution.

As the company progresses from one milestone to the next, it is getting harder and harder to imagine killer pitfalls and easier and easier to see a path to stable, long-term Tesla success. With this kind of changing "reality," with a market that now recognizes Tesla as a profit making car company, it is time for Tesla "shorts" to re-think what they know.

Five years ago, every "short" knew that Tesla could never make a competitive, mainstream electric car. Six month ago, every "short" knew Tesla was headed for Chapter 11. One quarter ago, every "short" knew Tesla would never make a profit. If you are short Tesla today, just imagine what you will know tomorrow.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Auto Manufacturers - Major
Problem with this article? Please tell us. Disagree with this article? .