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Summary

  • Tesla has a documented history of lashing out at critics.
  • Failure to heed criticism can lead to a dangerous complacency.
  • Tesla is reliant on one-time "pops" in deliveries to new markets.
  • Once a momentum stock runs out of momentum, downside risk greatly increases.
  • Severe overvaluation means the stock price will likely decline over time.

Tesla (NASDAQ:TSLA) has been the poster child for the 2013/2014 tech boom (or bubble, depending on your viewpoint) in the stock market. Everything "disruptive" (aka growing, yet unprofitable) has been celebrated and rewarded by the market, while everything "establishment" (aka not growing, yet profitable) has been punished, comparatively speaking. However, it appears increasingly evident that the market's support of Tesla is slowly waning. I believe that this is due to several factors:

First, Tesla's management has become increasingly paranoid over time, rejecting even the slightest hint of criticism and aggressively attacking the skeptics. The phrase he "doth protest too much" comes to mind when one thinks of Elon Musk. When a company's management begins to exhibit an irrational siege mentality, it is often a sign that its critics are on to something. In addition, failure to heed valid criticism can lead to a dangerous complacency within a company.

Second, Tesla's "beat and raise" strategy, so artfully executed during 2013 and which has fueled its recent stock price appreciation, appears to be more and more dependent on temporary "pops" in deliveries that result whenever Tesla enters a new market. Unfortunately, however, each "pop" is a one-time-only event and the number of markets for Tesla to enter is limited.

Third, Tesla's parabolic stock price can only defy gravity for so long. In the words of the economist Herb Stein, "If something cannot go on forever, it will stop." I believe that we are now witnessing the early stages of the correction in Tesla's market capitalization to a much lower level. The voting machine is gradually being replaced by the weighing machine.

Tesla has Developed a Seriously Bad Habit of Lashing out at Critics

Those who are old enough to remember the 1970s will remember Nixon's famous enemies list. This list was proof positive of the extreme level of paranoia that existed within the Nixon White House. Nixon viewed himself as constantly under siege by his enemies, which led ultimately to Watergate and his resignation in disgrace. Granted, it may seem totally unfair to compare Elon Musk to Richard Nixon; after all, the former is acclaimed as a visionary entrepreneur trying to save the planet from our reliance on fossil fuels, while the latter is archetype of the crooked politician. Yet one blogger made this exact comparison last year. And, indeed, Mr. Musk does seem to exhibit one particular Nixonian trait in spades: he has a complete intolerance of - almost amounting to paranoia with respect to - any criticism directed at Tesla, no matter how minor. Witness the following incidents, which serve as clear evidence of this unfortunate character trait.

First, we have the infamous New York Times article regarding Tesla. In response to the article, Musk called the review "fake" and claimed in a blog post that the reviewer deliberately sabotaged his test drive, claiming that "[w]hen the facts didn't suit his opinion, he simply changed the facts." But the reviewer and the Times stuck with their story, despite Musk's attack on their credibility (see here and here). The Times reporter even stated that when Musk accused him of driving around in circles in a parking lot in an unsuccessful attempt to run out the battery (the vehicle, in Musk's words, "valiantly refused to die"), he was actually trying to find a Supercharger station in a dimly lit area at night.

A few months later Musk abruptly and angrily terminated an interview with a skeptical Barron's reporter, merely because the reporter questioned whether battery costs would decline as fast as Tesla claimed they would. Apparently, what to Musk is an "obvious point" was exactly what the Barron's reporter did not think was obvious (otherwise, why would the reporter ask the question?). The whole point of a CEO giving interviews to a publication such as Barron's is to explain to investors why and how his company will succeed in the future. Merely asserting that the questioner is clueless and terminating an interview does nothing to advance Tesla's cause, although it does reveal something about the CEO.

"The customer is always right"...except, apparently, when he or she is a Tesla customer. Tesla has now reached the point where, instead of just battling bloggers and journalists, it is publicly battling its own customers. Recently, the company launched a broadside against one of its customers who dared to invoke a "lemon law" against Tesla in Wisconsin, asserting in a blog post that the customer had "tampered with" the car, implying that the customer was dishonest (does this remind you of anything?). While it certainly could be the case that the customer was at fault, why would Tesla go on the offensive publicly against one of its own customers? This strategy is bizarre, to say the least, even if Tesla is ultimately proven correct in court.

The three foregoing incidents evidence the fact that Tesla is simply intolerant of criticism. This paranoia is troubling. If Tesla's paranoia regarding its critics (and complete rejection of the substance of any criticism) leads to the company becoming complacent, operating results and customer satisfaction will inevitably suffer over time. As Warren Buffett has said, the key danger facing any company is complacency. Rather than rejecting criticisms out of hand and trying to stifle the critics, Tesla should welcome them and use them constructively to improve the company's products, practices and procedures.

Tesla Can Only Engineer so Many New Market "Pops" in Deliveries

Each time Tesla enters a new market for its vehicles, the company experiences a temporary "pop" in delivery numbers due to pent-up demand. For example, this Seeking Alpha article states that Model S deliveries in the United States peaked in Q2 2013, shortly after launch, with actual and estimated deliveries by quarter as follows:

Q1 2013: 4900

Q2 2013: 5150

Q3 2013: 4500

Q4 2013: 4000

Q1 2014: 3500-3750

Clearly, if this author is correct, deliveries have been on the decline in the U.S. over the past year, evidencing the fact that the initial "pop" in this market has subsided.

Similarly, we now learn that Norway is apparently the next driver of deliveries for Tesla. However, Tesla's advantage in Norway is mainly due to massive government subsidies for electric vehicles, which are due to expire in 2017 (right around the time Tesla is expected to ramp up mass production of its Gen III vehicle), so the company's edge in this market could well be short-lived. Thus, we find Tesla turning its attention to China, obviously a market with much more potential than Norway and perhaps even the U.S.

Yet, this constant need to enter new markets begs the question: How real is Tesla's Model S underlying demand? Why enter new markets at all (incurring delivery delays and additional costs by shipping the vehicles overseas) if demand remains robust in the U.S.? Why not focus on the U.S. until market demand there has become saturated and only subsequently enter into new markets?

Tesla has benefited over the past year by constantly topping the market's expectations regarding delivery numbers, almost to the point that the company now appears dependent on "beat and raise" just to justify the current stock price. But it also seems as if the "beat and raise" strategy depends on continually entering new markets with pent-up demand. The problem for the long case is that there are only so many new markets to enter, and thus only so many delivery "pops" left. Once these are exhausted, ongoing underlying demand, not just initial new market pops, will be required to justify Tesla's market cap.

Tesla's Stock Market Momentum Seems to be Slowing

While 2013 was a banner year for Tesla longs, with the stock price appreciating from 34 to 150, this year has not been quite as smooth sailing. Boosted by Q4 2013 results and the ever bullish sidekick Morgan Stanley, the stock price peaked at an astronomical 265 on February 26th, before sliding down below 200 recently. Astonishingly, Tesla's stock as of April 21st was actually in a bear market (down over 20% from its 52-week high).

Momentum stocks are obviously highly dependent on exactly that, continued momentum. Once the underlying thesis (i.e., Tesla will go higher because it's been going higher) becomes permanently broken, longs will need a new rationale to justify buying at current levels. Yet, no fundamental rationale appears to exist that justifies buying Tesla above 200; and on the downside, the rationale for longs to sell is obvious (avoiding further declines in the stock price).

Thus, in my opinion the risk/reward clearly favors Tesla shorts at the current price level.

Disclosure: I am short 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.

Source: Why Tesla Will Slowly Lose Credibility With The Market