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New Developments For Tesla

Sep. 05, 2020 9:21 AM ETTesla, Inc. (TSLA)SP5003 Comments
Ruerd Heeg profile picture
Ruerd Heeg's Blog
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Tesla not added to S&P 500

The main development is that Tesla (TSLA) will not be added to the S&P 500 (SP500), at least not now. It might be added next quarter. But if the company makes a loss in the coming quarter it could fall short on inclusion criteria, in particular the 4 profitable quarters in a row.

Critical articles

Also last Friday Consumer Reports published an extremely critical article on self-driving features of Tesla.

Last week the Motley Fool published a critical article on Tesla's source of profits: regulatory credits.

In a Swiss paper Tesla was compared to the fraudulent company Wirecard.

Call option buying

Both the Wall Street Journal and the Financial Times published articles alleging Softbank to have invested heavily in call options of the biggest tech companies, including Tesla. See here and here. Allegedly Softbank invested $4 billion in call options. We do not know the details of these positions. So this is speculation but I suspect it was done as follows. If on Monday the price was for example $1000 (pre-split) Softbank arranged owning many call options at $1000. These might have been partly financed by being short an equal number of calls at $1100. I think the duration of these positions might have been a couple of months. But it also bought even more options at $1500 and $2000 expiring Friday to push up the share price.

Apparently it did this week after week at various prices until the split and until it turned out the S&P committee did not want to add Tesla to the S&P 500. This scheme reminds me of the silver bubble created by the Hunt brothers a couple of decades ago. See here. It was not successful mainly because they pumped it too much. The bubble became so much inflated that they could not handle the opposition from various sides. I think something similar will happen with this Tesla bubble in the next couple of months.

August EU sales

August sales in the EU were slightly better than I had expected but certainly not good enough to justify Tesla's stellar market cap. See here.


Tesla will raise or has already raised $5 billion by selling shares in the open market. This is very unusual, especially for a company with such a huge market cap. Normally companies offer shares at a fixed price in an offer underwritten by banks. From what I read about it there can be 2 reasons for doing an at-the-market offer.

First, the auditor needs to sign off something for a normal underwritten offer. For other companies this is not a problem but for Tesla I guess it was. No such obligation when directly selling shares in the open market.

Second, banks might not want to underwrite a conventional offer, at least not at a reasonable discount to the share price. I doubt this is the case at Tesla.

After the at-the-market stock sales had been announced insiders started exercising options and selling shares, through automatic sales plans.

Also a large shareholder, Baillie Gifford sold to below the 5% threshold, just after the split. It said the sale was because of a portfolio requirement not to have too much in a single position. It also said it would stay a long term shareholder. But who believes that? I find that this was filed just after the split too much of a coincidence. If it was just for a rebalancing requirement Baillie Gifford would have timed the transaction differently.

Signs of financial distress

See here and here.

Bottom line

My opinion on the stock is still: strong sell. In particular I think that S&P did not add Tesla to the S&P 500 will put a lot of pressure on the stock. Furthermore I think more investors are going to sell now Baillie Gifford has sold. That increases the float much, on top of the extra shares from the new dilution. I do not think the market can snoop up these shares at the current stock price.

Analyst's Disclosure: I am/we are short TSLA.

Global Deep Value Stocks is a long only newsletter. I do not discuss stocks like Tesla in Global Deep Value Stocks.

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