The High Cost Of Shorting Tesla Motors
Apr 1 2013, 07:23 by: Forward Looking Guru | about: TSLA
As I mentioned in my article, Tesla Motors: A Perfect Hedge, betting against Tesla Motors (TSLA) is a bad idea. I suspect anyone who shorted Tesla, who is not hedged, is about to experience the "Tsunami of pain" that Tesla CEO Elon Musk has promised is coming for them. I have received a number of questions about recent Tesla events, with some people asking if I think the squeeze is coming. As I mentioned in my last article, I don't think a monster squeeze will happen, since the shorts are likely hedged. However, recent events have me suspecting that we should be prepared for prolonged bullish momentum that could begin as early as this week.
Motor Trend Car of the Year and World Green Car of the Year
The Tesla Model S is the first electric car to be awarded the Motor Trend Car of the Year and is the only car to receive the award by unanimous decision. Furthermore, it was announced on March 28 that the Model S has also been named World Green Car of the Year. Receiving these awards has historically had a very positive effect on demand. Tesla has only just begun to expand into Europe and Asia, so worldwide demand can go much higher from here, once consumers learn about the Model S, and have had the opportunity to drive it. Currently, global demand for the Model S is approximately 70 reservations per day (RPD), implying annual demand of approximately 25,000 per year. By receiving the World Car of the Year Award, Tesla has been acknowledged as a company with good products and global force to be reckoned with, besting major European names such as Mercedes and Volkswagen. European luxury car owners are sure to take notice. Elon Musk has stated that he expects demand to be about equal among Europe, Asia and North America. Demand from the United States is currently approximately 50 RPD. This number is an average. At certain points last year, following major announcements, demand for the Model S jumped to 100-150 per day. If Tesla can achieve demand of 150 (RPD), it will sell 54,750 Model S annually. If Tesla achieves demand of 54,750, and the ASP of the Model S is $75,000, Tesla could be deserving of a $35 billion market cap with a PE of 40 when you do the math: 54,750 x $75,000 x .25 = $1,026,562,500 + (10,000 x 54,750) = $1,574,062,500 - $400 million CAPEX - 20% tax rate = $880 million profit x P/E 40 = $35,200,000,000
I suspect the World Car of the Year award, coupled with an announced expansion of the Supercharge network would be a huge deal for the stock. Tesla has stated that it plans to announce these things in 2013. If they occur at the same time, I am confident investors will take notice.
Tesla is Hiring
Evidently Tesla sees what I see. They are hiring rapidly and, because of increased demand, are probably working on tooling the factory for a higher production rate. A quick look on indeed.com reveals that Tesla made 300 job postings for jobs ranging from engineers to accountants, to legal. It seems Tesla plans to increase its current work force of 3,000 people by almost 10% in the coming month. This should not come as a surprise, since Tesla has announced it plans to open 25 new showrooms in 2013, and has stated it plans to offer additional variants of the Model S that would lead to increased demand, beginning in early 2013. These postings suggest to me that Tesla doesn't plan on going away any time soon. Rather, it demonstrates the signs of a company preparing for an expansion of its operations.
Cost to Short Tesla
The cost to borrow shares of Tesla has skyrocketed to 85% from 40% earlier this month. This implies that demand for shares to short has far exceeded the supply, and that anyone currently short is paying a fortune to remain short. It seems Elon Musk was right when he posited that short interest had reached a peak. I suspect the closer we get to "Game Changing" announcements, such as demand reaching 30,000-40,000 units in 2013, or a massive expansion of the Supercharge Network that will be funded entirely by Elon's personal wealth, the higher the short interest will go. Elon Musk has told the world to prepare for an announcement that is sure to be a game changer, stating "Really exciting @TeslaMotors announcement coming on Thursday. Am going to put my money where my mouth is in very major way." Could this imply that he is preparing to make a game changing announcement next week? If Elon Musk announces any of the above things, it would be a very big deal, that no-one is expecting.
Conclusion
If Tesla can achieve demand of 30,000 - 40,000 per year, as Elon has mentioned he suspects it will, and is able to produce on the 25% gross margins he has promised, the stock is dirt cheap at $38, with a $4 billion market cap. I suspect many people have bought July - October calls, with the expectation that the stock will be much higher. These options will increase by over 1000 percent if the stock doubles. Shorting Tesla, if unhedged is a bad idea today. Last night Tesla announced that it has delivered over 10,000 Model S globally, is raising guidance, and is expecting to be profitable in Q1. This major event, coupled with a major announcement on Tuesday, such as Elon confirming that demand is currently already at 100 RPD, or if Elon announces that he is prepared to fund a massive expansion of the Supercharge network, could cause the stock to double by the end of this week.
