Don't Let Tesla Bears' Cage-Rattling Knock You Off Course

May.13.14 | About: Tesla Motors (TSLA)


Developments at Tesla have been very strong the past month.

Last week a slurry of negative commentary was directed at Tesla.

Here's why the bears have been so active, and what they may prefer you not see about Tesla.

Following Tesla (NASDAQ:TSLA) one becomes accustomed to a quite a volume of commentary that does not hold up to scrutiny from some of its detractors, often delivered with an intense tone. It's best to take this with some humor. Last week we saw the attempt to persuade the public of unfavorable prospects for Tesla reach a new high. Some of the bear growling was rather carried away, I'm sure they had some fun with some of the writing, but it seems only fair that Tesla longs have some fun debunking what's been served up of late that simply does not measure up to the facts.

Just a short note to bear in mind. I'm not contending that all shorts or bears are more interested in growling and cage rattling than fact checking. I'll use the terms bears and shorts in this article, but make no mistake this is simply shorthand for the subset of bears and shorts who have a bit of sport in their tone and presentation of information, by no means a suggestion that all bears and shorts do this.

Why Did Tesla's Detractors Jump the Shark?

I think there are three primary reasons the shorts went overboard in their growling. Firstly, the company knocked out two of the best openings the bears have had to portray Tesla as headed for trouble over the past three months. Secondly, quite a number of stocks that had very strong runs over the past year or two had come down sharply this earnings season, and I think the bears sensed this was their best opportunity to create the impression that Tesla was a "momo stock" and/or "bubble stock", which if successful, could bring the price of the stock down via association with these recently hard hit stocks. As I'll explain below, despite widespread repetition, I contend that the "momo" and "bubble" tags are being incorrectly applied to Tesla. Finally, the conference call on first quarter earnings had several positive developments, and growling and cage rattling might serve as a means of distracting the market from this progress.

Openings for a bearish forecast removed

Wednesday Tesla took out the short's speculation of plateauing, or even falling North American demand for the Model S. In Tesla's shareholder letter and during the conference call with analysts later in the day, Tesla stated, "North American net orders grew sequentially by more than 10% in the quarter." At other points in the call Elon Musk put it this way, "I mean I can tell you definitely what we see as we see a steadily increasing demand in North America." Since Tesla began delivering cars to the EU, the shorts have been turning a blind eye to the basic rules of arithmetic to present a thesis of Model S demand in North America plateauing. If you have 6,000 cars produced in a quarter, and all vehicles produced are delivered to North America, clearly you will have 6,000 cars delivered in North America for the quarter. If you have 6,000 cars produced the next quarter and you are now delivering X cars to customers in the EU, putting Y cars on boats to the EU, and putting Z cars on boats to China, you will have 6,000 - X - Y - Z cars delivered to North America. Whether demand has plateaued or doubled in North America, limited production, and cars now channeled to X, Y, and Z lower North American deliveries (note, while it's true production of vehicles increased roughly 1,500 units over the last 3 quarters, the fact that X + Y + Z is greater than 1,500 (and it is) lead to the same situation as the simplified version I used for clarity of presentation). Thus, the new channels of X, Y, and Z, gave the shorts the opportunity to try to suggest a problem where there was no concrete evidence of one. With the statements on the call we know the problem did not exist.

As a preview of how the bears can be overzealous, one critic came up with a very creative means of trying to retain the "plateauing demand" thesis. He wrote an article noting that Tesla had merely said net orders were up sequentialy for the quarter, but not specifying that this referred to Model S alone, and not Model S and X. That is, he jumped to the conclusion that Model X reservations were being cleverly used to cover an alleged plateau of Model S sales. Had he called Tesla Motors and asked whether the 10% increase was only for Model S, I can only imagine he would have gotten the same answer I did on Friday, "yes, the 10% increase in sequential orders is specifically for the Model S" The entire piece was based on conjecture of deception by Tesla, without questioning the company about the conjecture. It was a case where the appeal of growling and cage rattling got a bit ahead of any interest in checking conjecture against facts.

The other thesis of dark clouds over Tesla presented over past couple of months debunked in the conference call regards Tesla's Gigafactory. Tesla is looking to form a partnership with Panasonic to finance, build, and operate the Gigafactory. Tesla has expressed their aspiration of Panasonic joining the project, though never described it as a certainty. A couple of months back, a Panasonic executive suggested that the company will have to look at Tesla's proposals as Panasonic's investment in initiatives are usually more conservative than this one, typically committed to in increments over time. Now, clearly it would have been valid to point out that Panasonic had not signed on, and that they had expressed some caution about the nature of the project. It was worth some note of caution for anyone following Tesla. What followed in the comments sections of various Tesla articles was quite a dire interpretation of Panasonic's comments... repeatedly it was suggested Panasonic was walking away from the deal. Again, they were not rosy comments from Panasonic, but Tesla had never claimed a done deal for Panasonic to walk away from. Moreover, Panasonic was expressing caution, not rejection. Tesla closed this opening to conjecture doom and gloom for Tesla's aspirations for a partnership with the battery maker on Wednesday's call. Panasonic has signed a Letter of Intent with Tesla. While as yet not a signed contract, that is the direction the two companies are currently headed toward, and conjecture that Panasonic is not interested just does not make sense with this development.

Time is Running Out on Bear Attempts to Depict Tesla as a "Momo Stock"

I think what really defines momentum stocks is speculation of potential future earnings of a level no one really has a clear handle on and a probability of success of reaching any particular level of earnings no one has a clear handle on. With no one having a reference point of what earnings might be, and how probable they are, the stock price has no bearings, and moves with sentiment.

An example of such a momentum stock would be a social media stock, for example Facebook a couple years back. A billion users, so, to a momentum buyer, "yeah, they'll figure out how to quantify that user base and they'll be a giant this century." to a momentum seller, "how do we know they'll monetize any of those users. how do we know Facebook doesn't become "uncool" and that billion erodes steeply over a few years." (I say Facebook a couple years back, because while I don't follow the company at all, apparently at this point they've had some success figuring out how to make money, and there is considerably more of a sense of how to estimate future earnings now).

Tesla on the other hand, while of course not having certain earnings, has potential future earnings based on successful design and execution of a third generation product based on their successful second generation product. Solid execution of a Gen III product clearly has a market, as opposed to the vague notion in 2012 of monetizing a billion Facebook users. Potential earnings based on a successful 3rd generation product are also not pulled out of thin air, but rather on concrete information about the Fremont plant's capacity, the capital Tesla has on hand, the margins they are getting on the second generation product and how credible management is when they estimate margins, capital needed for Gen III, etc., based on their track record for the 2nd generation product. of course, probability of execution on Gen III is not a certainty, but such estimation of probability is far more meaningful than the wild guess of "one day this social media company will figure out how to make money from all these people on it's website."

So, we may argue about the probability of 2020 Tesla reaching our earnings target, and we may argue about various inputs in estimating that earnings target, but based on 500,000 vehicles, low to mid teens margins Tesla has suggested, and mid to low $40K ASP, I'm not alone in a ballpark $15 eps estimate. that is a point of reference from which I decide whether I think TSLA is cheap or expensive. I think what defines momentum stocks is the lack of such a credibly based point of reference. This is why I don't consider TSLA a momentum stock.

Positive Developments the Bears May Prefer You Not Notice

There were several positive developments Tesla shared on Wednesday's call. To begin, management not only expressed high confidence of achieving previously targeted 30% cost reductions for its batteries with the Gigafactory, they expressed cautious optimism of exceeding 30%. Management filled in the prospects of greater cost reduction with some details of new opportunities they are seeing to work with mining companies to make the supply of raw materials more efficient.

In addition to the Letter of Intent with Panasonic I've mentioned, they announced that the Gigafactory will break ground in about a month, well ahead of anyone's expectations.

On the call, Elon Musk repeated a theme he began in China last month. He suggested that Tesla will begin local manufacturing in Asia in 3-4 years and will also look at doing the same in the EU. Generally, expectations are that Tesla is targeting 500K in annual vehicle production in 2020. While I think it's premature to start modeling into earnings forecasts a second plant in Asia or one in the E.U., the comments are suggestive that 2020 vehicle volumes could be double the current top of expectations…. possibly triple in the early 2020s.

For what it's worth, on the topic of a plant in China, Musk took the opportunity to clear up some overzealous cage rattling that had been going on since he first made such comments last month. Musk explained that the plant in China would be for local production for Asia and would not replace Tesla's production in the United States. I guess word had gotten to Musk of an interesting stream of comments that had appeared in response to various articles on a future Chinese plant. These comments jumped to the conclusion that Tesla was going to take the American public for a ride and ship off it's manufacturing jobs to Asia. Musk directly revealed that no jobs were being shipped out of the U.S..

Tesla also clearly gave great detail on it's imminent alleviation of supply constraint over the next several months while improving margins. This will have Tesla producing over 1,000 vehicles per month by the close of the year. Here are the comments from the transcript of the call:

"for the first of this year we're constrained by cell supply. We expect that to I mean, it is in the process of alleviating and we expect that to really start alleviating in the third quarter basically. And there's obviously a bit of a late because the cells coming from Japan. They've got it produced and port on the water and port over here and that kind of thing. Thus far from what we see that you have things on track to have cells not - be able to at least meet, but probably exceed by little bit the 35,000 in targeted deliveries. Our production number absolutely higher than that, because the Company's growing quite a bit of nickel that will be only to best countries.

And then, the benefit other constraint, which is the vehicle production line. So, it actually will actually be taking the factory - the Fremont factory down for roughly days or so in July to convert inline, which enables a substantial increase in our production capacity on the vehicle side, as well as a labor house reduction. So it's just fundamentally more efficient process."

When you consider that Tesla looks to be producing 1,000+ cars per week exiting this year, all of them Model S, and begin producing Model X by mid-year, they are likely to produce 65-75,000 vehicles next year (roughly 50,000 Model S + 15-25,000 Model X). That would crush analyst expectations. I base this on estimating an average expectation of under 54,000 vehicles sold next year by dividing the analyst's expected revenues by a conservative $100,000 average sale price (ASP is likely to be higher, which implies an even larger gap between analyst's expectations of vehicles sold and higher volumes Tesla looks on track to deliver).

During the call Tesla was asked about battery storage. While they indicated that battery supply is a near term obstacle to this aspect of the business delivering substantial revenues, they described a very promising market, "And the demand for - the long-term demand for stationary energy storage is quite extraordinary. When you look at the size of the grid and what needs to be done with renewable energy and buffering the variability of that."

All this good news rides on the heels of the fire risk for the Model S becoming a fading memory (now over 6 months since the last fire, and a quite inexpensive added layer of protection having been put in place), and a considerable swing in the direct sales issue in recent months, with Governor Christie's efforts to derail Tesla backfiring in the court of public opinion, and the recent letter from three FTC officials (to be clear, not an official FTC letter) supporting Tesla's position. Of course, perhaps the most positive news in recent memory, Musk's trip to China last month was met with something of a Teslamania from the public, and a very welcoming response from the Chinese government. There may be tremendous synergy between Tesla's passion and technology for EVs and grid storage and the Chinese government's passion and deep pockets for the same.

So Where Exactly Have the Bears Gotten Carried Away of Late?

How about an article citing competition for the Model S from the new Mercedes B Class, without mentioning the motor and battery in the B class are purchased by Mercedes from Tesla.

Or a radio interview where Doug Kass, whose short Tesla, compares Elon Musk to PT Barnum (comments 5:40 into the interview). Remember, Musk has led a team to successfully start up a mass market car company (not done in the U.S. in seven decades), and another team to launch rockets into orbit and dock with the international space station (something only achieved by 3 or 4 other entities, as in nations). This is not to mention his achievements at SolarCity, Paypal, or Zip2. All the carnival barking in the world could not have done any of this.

Beyond those specific overzealous pieces, there's the general repetition of the now debunked disappointing sales mantra. It seems this matra got repeated so many times, for many Tesla's straightforward refutation of it has yet to sink in. In this interview, after the earnings were released, two guests repeat that mantra, two hosts echo this, and one guest dismisses the idea that production constraints were what limited deliveries this past quarter, and a few minutes later dismisses the notion that Tesla will have sales growth in China because the company is production constrained. Finally, one of the hosts claims the Model S ASP is $122,000 (about 20% off).

Finally, this piece showed up today while this article was being looked at by Seeking Alpha's editors. I wont break down all the details of the piece, but with words like "debacle," and "horrible" talking about Tesla's possible future and valuation, it may be the text book example of a bear so angry, thinking straight is just not part of the equation.


We live in an era where anyone with internet access can listen to corporate communications live. Seek primary sources, and think for yourself. That way, the drama of the market and its commentators can give you a good chuckle without disrupting your investment returns.

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.