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New Developments For Tesla

Dec. 02, 2020 3:23 PM ETTesla, Inc. (TSLA)SP5005 Comments
Ruerd Heeg profile picture
Ruerd Heeg's Blog
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Call option games

From the end of last year until the end of Summer 2020 traders successfully tried to lift the Tesla (TSLA) stock price by buying far out of the money short term calls. See here. Apparently one of these traders stopped these practices. I suppose going forward he does not expect any positive sentiment supporting this trading strategy. I wonder whether others will follow him, or will even try the opposite strategy with far out of the money puts.

S&P 500 addition

On December 21 S&P will add Tesla to its S&P 500 (SP500) index. Instead of following a phased approach index funds will have to swallow the whole bitter pill in one go. See here. According to S&P there is enough liquidity to accommodate index funds. Moreover I think index arbitrageurs have accumulated way more shares than index fund need to buy. See also here. So there will be plenty of supply.

Musk suggests stock price is too high, again

Musk wants Tesla employees to focus on "profits and cost-saving" according to Electrek. In the article Musk confirms operating profit margin is extremely small. This is different from what investors expect from a growing company that would be constraint by production. He also wrote the stock price would "get crushed" if Tesla does not continue to show good profits.

That will be difficult because Tesla has to sell a certain minimum number of cars to break even. We do not know the exact number but as a good rule of thumb for car manufacturers is 80% of production capacity. So far Tesla managed to sell enough cars by introducing new models and introducing them in new markets. And when that did not work anymore Tesla started to cut prices. Now Tesla has dealt the last cards in this game. No more new new modes, no more new markets, and more price cutting will not make the business profitable either.

Providing worse service and using cheaper parts is still possible. The problem with cheaper parts is Teslas already have low built quality and service is already bad. I suppose they will continue to save on built quality and service since management has no other alternative.

Some Tesla bears predict Tesla will do a big dilution around the S&P 500 addition. Or even Musk might sell his own shares. After these remarks I doubt it. Musk is simply too concerned about the stock price. Selling now will also make him vulnerable if he ever has to defend himself against fraud allegations in court. But other insiders will sell. I suppose Larry Ellison will sell after Tesla files its annual report, most likely in February 2021.

Can Tesla support its stock price by buying another company?

Musk is open to a discussing a merger with "a rival". I suppose that means another car company. Is he also open to discussing a merger of equals? I doubt it because that would mean Tesla would need to open its books for "a rival". It would have to give details about its cash balance, accounts receivables, customer deposits, inventory and so on. I find that unlikely.

Moreover "rivals" might still remember the merger of AOL with Time Warner from the dotcom days. AOL was much overvalued. The merger was done by exchanging shares. It did not go well for shareholders of Time Warner that held their shares after the merger.

It is still possible that Tesla does several smaller acquisitions. It could help postponing the inevitable decay of its share price. But it will only support the stock when management builds a good story around these acquisitions. In practice this means Tesla will have to buy "growth story companies". Such companies will add little immediate value to the company's assets, only far away future value.

It is possible Tesla does a series of such acquisitions. But I do not think it is likely since Tesla can only do such acquisitions in the remaining months with a stock price that is still high. I do not think there is enough time for Tesla do complete a meaningful number of such acquisitions. Moreover developing growth story companies requires good management to deliver a high quality product. Tesla has indeed shown it can build cars on a large scale. But if management has shown anything then it is it cannot develop a high quality product.

Bottom line

My opinion on the stock 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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