Tesla Bears Retreat

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About: Tesla, Inc. (TSLA)
by: ValueAnalyst
Summary

Nasdaq released the latest data.

What scared the bears?

Is a short squeeze still possible?

I said in January 2018 that:

Tesla (TSLA) bulls and bears have both dug in their heels, and unless the company's fundamentals show a decisive improvement or deterioration, I do not expect either side to give up anytime soon.

The long-awaited fundamental improvement is here, and one side is bailing:

Chart

Data by YCharts

The short interest in Tesla has declined to the lowest in more than three years.

Where are y'all going?

Why Are Bears Running Away?

Is it Tesla's $3.7 billion strong and growing cash position:

Chart

Data by YCharts

Moody's estimated that Tesla must maintain "$500 million in minimum cash" for normal operations, and even after considering the $900 million that Tesla may need in a few weeks to pay off maturing convertible debt, the company will still have more than $2.5 billion before considering the free cash flow that it will generate in 2019 as well as the low-cost debt capital that it will access.

Is it Tesla's positive and increasing free cash flow?

Chart

Data by YCharts

In Q3 2018, Tesla reversed its infamous "cash burn" to positive, and in Q4 2018, it achieved what many bears had deemed impossible by growing its free cash flow from the previous quarter.

Is it Tesla's industry-leading operating margin?

Chart

Data by YCharts

Except for Toyota (TM), no major automaker has so far reported a Q4 2018 operating margin that is higher than that of Tesla, and I expect that those automakers who are yet to announce their Q4 results will report operating margins less than Tesla's 5.8 percent. In 2019, I expect Tesla to achieve higher operating profit margin than all other major automakers.

Is it Tesla's "higher than even I expected" degree of operating leverage?

Chart

Data by YCharts

Bears had argued that Tesla's selling, general, and administrative (SG&A) expenses would grow just as quickly as its revenue, but to the contrary, Tesla doubled its quarterly revenue while its SG&A expense, wait for it, declined.

As I will explain to Value Portfolio members tonight, there's more than meets the eye in Tesla's declining SG&A expense with significant implications.

One More Thing

In recent months, Tesla has been testing full self-driving ("FSD") features with hundreds of employees, and I believe that the rollout of at least one FSD feature is imminent. If my prediction proves correct, then the demand for all Teslas, including Model S, Model X, and Model 3, as well as the upcoming Model Y, would likely increase significantly throughout 2019.

Is A Short Squeeze Still Possible?

Yes, it is, but given that days to cover has declined from 4.5 to 2.5 in the last two months, it's unlikely that Elon will get his "short burn of the century" unless if Tesla announces extremely positive news that will move the stock more than $100 per share in less than two days.

Tesla Short Interest and Days to Cover

I know what might cause such a sudden surge, but I won't say.

Bottom Line

Bears have reduced their positions from a high of 40 million shares in early 2018 to now less than 25 million. I still believe that Musk may eventually get his "short burn of the century," but admittedly, the probability of a short squeeze has declined along with the lower short interest and days to cover.

Disclosure: I am/we are 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.