Tesla (NASDAQ:TSLA) earnings report Wednesday will be the most anticipated earnings announcement of the current earnings season. Short sellers believe that the report and ensuing conference call will demonstrate Elon Musk’s inability to execute and Tesla’s imminent decline. If you look at the scoreboard, however, long-time Tesla shorts have been pummeled over the last 5 calendar years as Tesla’s stock has risen from around $30 per share to over $300. Their total losses are likely far worse due to interest on margin debt and the costs of borrowing Tesla stock. They have collectively doubled down again and again, forced to post ever more collateral to cover their positions.
I’m neutral on Tesla and currently have no position (I sold my shares in 2015 for a little shy of $290). I fell out of love with the thesis and sold right before a secondary offering. I then moved on with my life. By obsessing over Tesla, short sellers are wasting time and energy they could be spending on identifying the next great companies and making millions for themselves and their families. If you are thinking of shorting Tesla, take a step back from the ledge, take a deep breath, and consider investing your money in literally anything else.
Whichever side of the trade you are on, Tesla’s share price growth has been impressive, despite the stalemate since 2014. However, Tesla is not even close to the only company that has seen this kind of growth over time. There are so many opportunities out there in small and under-covered companies.
Growing up, I lived a few houses down from the late Neal Patterson, co-founder of a healthcare technology company called Cerner. Cerner was one of the earliest players in electronic health records. Over the last 20 years, Cerner’s market cap has grown from a few hundred million dollars to close to 20 billion. The same way Microsoft made tens of thousands of millionaires out of its early shareholders, early Cerner shareholders in Kansas City saw their money double again and again. Every $10,000 they invested in the company in 1998 is now worth $620,000. Some shareholders from a few years earlier are up over 200 times their original investment. I bought in 2010 but still more than tripled my money before cashing out.
Even with all the growth, Cerner’s market cap is still only 20 billion dollars. The company isn’t undiscovered anymore, and I would only expect it to keep pace with the S&P 500 at this point, but the next Cerner is out there somewhere. There are huge opportunities out there in small companies, you just have the intuition, a talent for reading in between the lines, and to be willing to wade through annual reports and press releases to find said opportunities. Tesla shorts could be the some of the smartest investment minds in the world, but they won’t see their money multiply by 200 times no matter how long they stay short.
Why You Shouldn’t Short Tesla
- Tesla stock is perpetually hard to borrow. Due to the enormous short interest in Tesla, you have to pay to borrow the stock for short positions. The shareholders and their brokers then pocket this money. The borrow rate over the weekend for Tesla was a little shy of 2 percent but has spiked twice this year to more than 10 percent. In 2016, the rate spiked to 45 percent annualized and stayed above 10 percent for months. Does anyone want to take out payday loans for a Tesla short position? These fees are distinct from the interest that you are charged if your short positions are marked to market against you. Tesla short-sellers have had the privilege of paying both of these, often at obscene rates, over the last 5 years. Even if Tesla eventually does fall 50+ percent, they may have lost more in interest than they make from the fall. Also, if you are thinking of being short, you need to think about what you would do if the borrow rate goes through the roof again. You have no control over the rate, you just have to take it.
- Tesla probably isn’t going to run out of cash. Tesla loses money on an operating basis in order to grow their company faster. This creates the risk that they won’t be able to get the cash flow they need from financing to keep their operations going. However, Tesla has the option of raising capital by selling stock. Pro tip: share prices around $300 are not indicative of companies with problems raising capital. During the crisis, banks massively diluted their shareholders with secondary offerings at rock-bottom prices. Musk has been able to raise capital at favorable prices because Tesla stock has gone up over time. If Musk needs the money, he can do another secondary offering. Speaking of running out of cash, there are still a lot of Tesla shorts out there paying outrageous amounts of interest from the margin loans they had to take out to cover their short positions. They are likely to run out of money (or get cut off by their risk managers) before Musk does. If they really needed to raise money that desperately, then Tesla probably would have already done so. Some of Tesla’s moves to conserve cash might be to appear like a responsible corporate citizen to the capital markets rather than due to genuine concern over running out of money.
- Tesla has a cult following. Elon Musk is charismatic, erratic, and 100 percent invested in the success of his company. But every bit of time and energy Musk spends threatening to sue journalists and engaging in Twitter wars is time and energy he could spend making electric cars the main mode of transportation in the world. Is TSLA a great investment at this point? No. They’re constantly having to raise capital so investors’ share of the future profits is likely to be diluted, and they’re expensive as hell from a valuation standpoint. Tesla could very well miss their production numbers, raise more capital, get back on track and have a much higher stock price a year from now. It is, however a great company with the potential to change the world. This fact and this fact alone will keep Tesla stock afloat.
- Successful short sellers typically follow a common script. They develop a thesis on a company, build a short position, and use the media as a megaphone to expose the company they bet against. If investors agree and sell their shares, the shorts make a tidy profit. This works great for exposing companies like Valeant. However, this model didn’t work for betting against Silicon Valley-backed companies that aim to upend entire industries, like Tesla, Netflix, and Facebook. Do short sellers have a point about valuation, cash flow, balance sheet, margins, etc? Of course. Where there’s smoke there’s fire. That doesn’t mean shorting Tesla is a better opportunity than any of the great long investments out there. In fact, shorting Tesla has cost some very smart men billions of dollars. If you don’t like Tesla, simply don’t buy Tesla. Put your capital in another opportunity you believe in.
What short sellers seem to want more than anything is validation. If you want validation, adopt a puppy. Or call up an ex after 10 o’ clock at night. Or take a vacation. And when you get back, find a way to get in front of big macroeconomic trends or find the next Microsoft, Cerner, or Apple rather than trying to short the most controversial stock on Wall Street.