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New Developments For Tesla And Nikola

Sep. 21, 2020 4:18 PM ETNikola Corporation (NKLA), TSLA1 Comment
Ruerd Heeg profile picture
Ruerd Heeg's Blog
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Can bubble or fraud stocks go down without a catalyst?

Here is a twitter thread about another bubble stock from 2017. The thread does not mention the company but it is umbrella manufacturer China Jicheng Holdings trading in Hong Kong with ticker 1027.

In May 2017 David Webb, an investor following companies listed in Hong Kong, published an article on "50 stocks not to own". China Jicheng Holdings was one of the stocks "not to own". After that article share prices of these companies started to decrease. But Jicheng saw a final pump first. See the chart below:

Then insiders and other companies in the so-called "Enigma network" started selling. Before the stock crashed China Jicheng Holdings shares had P/B of about 10. Now P/Tangible Book is only 0.1, so 100 times lower. Most of the price decrease happened in 2 weeks in June/July 2017. That was more than 95%: from 112 to 4-5 HKD. Was it cheap at that price? The market did not think so. From 4-5 HKD the share price slowly decreased to 0.25 HKD today, so again more than 95%.

Again: no real catalyst whatsoever. Investors should be aware such a sudden share price decline can suddenly happen with bubble stocks. Tesla (TSLA) is such a stock. And the risk with Tesla shares are much bigger as with this umbrella manufacturer mainly for 3 reasons:

  1. More product liability issues, among others with Autopilot, Full Self Driving and sudden unintended acceleration events. It is much more likely Tesla has to recall its cars than Jicheng has to recall its umbrellas. Also recalling cars costs more than recalling umbrellas.
  2. In the tweet I wrote the regulator did not do anything. To be fair, it did a little bit but not much and with enormous delays. I think once Tesla starts falling effective regulatory actions against the board are very likely and could happen almost immediately. For example a ban on Autopilot and on selling Full Self Driving could arranged within 2 weeks.
  3. Shareholder protection laws are much better in the US than in Hong Kong. Investors, former employees and customers have started many class actions and other lawsuits. They have been delayed because of the coronavirus but I expect most of them to be decided within the next 2 years. Depending on the outcomes of these lawsuits Musk may have to leave Tesla.

What to expect on Battery Day

I think this tweet describes it well. Most likely the company will announce a new battery product with nearly unlimited demand. Like many times before the company will overpromise on the time to develop and to market and will overpromise on the specs and prices.

Other news

Allegedly the Shanghai plant will temporarily stop production on September 20, 2020. Apparently there is not enough demand to use all available production capacity.

There are several reports of increasing inventory in the US. See here, here, here and here. It remains to be seen that this inventory can be sold. I think Tesla is producing too many cars to honor its purchase obligations to Panasonic.

Apparently Tesla started to give discounts to new buyers in Norway. That will increase deliveries but will also increase losses.

"Possible Record Deliveries"

Yesterday Musk sent an email to employees suggesting record deliveries are possible. I think the language he used was not so bullish for investors in Tesla. With the China factory and the coronavirus fading I think record deliveries should have been a slam dunk. The language he used suggests deliveries to be below 120k for Q3. That is way below estimated production capacity of 170k (120k Fremont and 50k Shanghai) per quarter. With such a delivery number it is very unlikely Tesla will be profitable.

I find the following 2 sentences noteworthy: "It’s also extremely important that we keep factory output as high as possible over the remaining 10 days. This is vital for the California market." Apparently keeping factory output in Shanghai as high as possible is not so important. Why would that be different from Fremont?

New development for Nikola

The founder and executive chairman of Nikola Corporation (NKLA) left, "voluntary". We do not know why but could it be related to the recent fraud allegations? The market cap is still above $10 billion but the real value probably much less than $1 billion. Therefore I think Nikola is still a strong sell: usually the departure of the executive chairman is just the beginning.

Bottom line

As I explained bubble stocks can suddenly fall with 90% or more. I think that is going to happen with Tesla but do not know when. But I do not think it will happen in more than 8-10 months. By that time I think the majority of investors will have noticed lack or demand and declining deliveries. Other negative news can still have a big effect on the stock price. In particular much of the bubble valuation is related to Elon Musk. Be aware he can step down, just like happened at Nikola Corporation.

So my opinion on Tesla  is still: strong sell.

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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