Despite all of the speculative criticism surrounding Tesla Motors, Inc. (TSLA) since its initial public offering in mid-2010, the company has continued to defy expectations. Year-to-date, shares of Tesla have soared over 60% to an all-time high, leaving many (if not all) investors with a short position in the deep red. What's the catch? The company has a short interest of roughly 45% of its float. With recently parabolic appreciation in share price, short-sellers are being forced to purchase shares in exponentially growing masses. For those long Tesla, you can expect the share price to continue to grow for the near term. The short float is substantial enough that it would take roughly three weeks to cover all short positions (based on average daily volume). This leaves those with long positions an opportunity to cash in on a potentially massive short squeeze.
1. Better than expected Q1 Model S sales
In the first quarter of 2013 Tesla has already delivered 4,750 units- 5.5% (or 250 units) more than previously expected. Unexpectedly however, these sales figures have somewhat significantly outpaced the ever-popular Chevy Volt (4,421 shipped) and Nissan Leaf (3,700 shipped) models. While a small/mid-cap motor company outselling major competition in the plug-in automobile space may seem impressive, what is even more impressive is that Tesla has maxed out its production capacity, and is still pushing to grow further. News of better-than-expected Model S deliveries has helped to push shares higher in recent weeks and should continue to provide upward pressure as the company continues to push towards its 20,000 builds-per-year goal for 2013.
2. New Leasing Program Should Beef Up Backlog
In the past, critics of Tesla have claimed that the price of replacing key components in the vehicle and the expected low resale value would hinder the company's ability to sell the Model S. However, on Sunday, CEO Elon Musk delivered a new "leasing program" for the Model S. In this new deal, Tesla claims to have created a "financing product that combines the surety and comfort of ownership with all the advantages of a traditional lease." To explain- when financing a Model S, (which typically carries a 66-month payment plan), the owner has the right after only 36 months to trade in the vehicle for the same residual value as a Mercedes Benz S-Class. This provides Tesla owners with the guarantee that their vehicle will retain its value, putting the battery-life issue at bay. Combined with the company's new service and warranty program (which is the self-proclaimed "world's best"), this financing agreement should entice many new prospective buyers to actually make the purchase. Look for continued updates in Model S deliveries to surface in coming months to push the share value higher.
3. Swing to Profitability
Tesla has repeatedly reported quarterly and annual losses since its 2010 IPO. For the year ended December 30, 2012, Tesla recorded a loss of $396 million on revenues of $413 million. However, in Q4 of 2012, the company saw revenue growth of 600% with a decrease in cost of goods sold. On May 8th, Tesla is expected to report its first ever quarterly profit. Based on my projections, I see EPS coming in between $0.07 and $0.08- higher than Street estimates of $0.03-$0.05. In the past few quarters, TSLA shares have reacted positively to the negative earnings reports, giving merit to the idea that a positive earnings release could potentially cause a drastic upside move. Out-of-the-money call options ($60 and $65 strike price) set to expire on May 13th have seen a spike in volume, and it seems that many investors may be beefing up or leveraging their positions going into the expected positive earnings report.
4. Look for Higher Guidance
Along with the positive earnings report, look for CEO Elon Musk to raise the FY2013 guidance. Backlog orders continue to stack up for Tesla, and the company is growing production capacity at a brisk pace to meet the expected demand that will accompany the new financing and warranty plans. Look for suggestions that margins will expand in the coming quarters as well as the company continues to cash in on the favorable effects of economies of scale. As capacity increases, the cost of producing each unit decreases- an economic concept that Musk is very aware of. In fact, his business model is to start with very high-end vehicle models such as the Roadster and Model S that can be priced to somewhat offset the high production costs associated with producing a low number of units per year. Again, as the fiscal year continues, look for margins to expand.
Tesla shares are appreciating at an exponential rate, forcing those shorting the stock to cover their positions by purchasing shares in the open market- a textbook short squeeze. What is interesting about Tesla, however, is that the short interest is nearly half the existing float. This means that if the share price continues to rise, which I believe it will for the aforementioned reasons, a tremendous amount of long positions will flood the market, causing an even quicker inflation of share value. For those with long positions in Tesla Motors, Inc., I recommend holding your position through the company's earnings next week. For those short, I recommend covering your position immediately to avoid the risk of a disastrous squeeze or, even worse, a margin call.