Wednesday 10 February 2021

Shorting Tesla

I usually do long trades, and these days mostly trade indices or ETFs rather than individual stocks, but Tesla seems so over-priced as to beggar belief. I thought it was overpriced last year when it was trading around $150, only to watch it climb rapidly to $900 before pausing around that level.

I did a bit of research into Tesla's EV sales in recent years, and they did grow from around 1,500 per month back in 2017 to around 60,000 per month during 2020. This growth is largely driven by the increase in global EV sales, rather than Tesla continuing to make huge inroads in EV market share compared to other vehicle makers. For example, VW and BMW have remained relatively constant around 5% each of the global EV market, whereas Tesla had grown its share from around 10% in 2017 to around 25% some months during 2019-20. However, its market share appears to be flattening out around 15%-20% during 2020, so its sales might grow only in line with global EV sales rather than due to increasing its market share in future years.

Year   Tesla EV sales    Tesla EV market share

2016      75,890            9%

2017    103,020            8%

2018     244,920          12%

2019     367,200          17%

2020     424,467          18%

And although Tesla revenue continues to rise strongly, it has not seen a break-out in profitability (although it has managed to achieve profitability).

While I had toyed with the idea of shorting Tesla several times during 2020, there is theoretically no natural limit to how much you can loose taking a short position (while you can only lose your initial investment when going long (buying a stock), you can loose much more than your initial investment when you go short (sell a stock you don't own). For example, if you buy Tesla at $1,000 and it goes broke you would loose the entire $1,000. But it you short Tesla when it is $1,000 and it goes to $3,000 before you decide to close out your position, you would have lost $2,000.

But Tesla appears to have reached some sort of plateau around $850-$900 this year, so perhaps wild optimism is making way for a more realistic appraisal of the future potential profitability of the company?

An article in today's SMH supports my view that Tesla is already overpriced, for example pointing out that:

Tesla is valued at more than the combined worth of the top 13 global car manufacturers (who together produce more than 80% of global vehicles, and have 100 times Tesla's car sales). This might be OK if Tesla looked like wiping out all other EV car manufacturers as the world moves towards 100% EVs, but its market share seems to be stagnating around 20% of EV sales as other major manufacturers transition from making fossil fueled vehicles to EV production.

If Tesla grew its EV sales 50% each year for the next decade, it would increase its sales 58-fold, but to do so it would have to wipe out practically all other EV manufacturers. And EV sales would have to represent practically 100% of all vehicle sales by the end of this decade.

So if Tesla manages to improve its net margin to 10% (more than any existing car maker) even unbelievably good performance over the coming decade would still only justify a share price of $427 (half its current level) - even the most optimistic possible scenario over the next decade can only justify half its current share price.  

Continuing product quality issues may also adversely impact Tesla's sales growth and market share:

"Tesla has been asked to recall 158,000 Model S and Model X vehicles over an issue with failing touchscreens, which could increase the risk of crashes. The problem involves the memory chips used in the displays of cars made between 2012 and 2018, which wear out, causing the screen to stop working."

While not a huge issues by itself, Tesla seems to have problems with quality as it ramps up production levels.

Overall, while there is always potential for a darling stock like Tesla to continue to enjoy a soaring stock price well beyond what can be justified on any fundamental basis, I think there is considerable scope for a substantial stock price correction.

Today I added $1,000 to my CityIndex CFD trading account so I could place a Sell order for 4 Tesla shares at $849.15 (around the current price), with a trailing stop loss $30 above that (so I should limit my loss to around $150 if the stock rises above $880 (close to its previous highs).

The US market was closed when I placed the order, and I'm not entirely sure what the margin requirements are for short sales, so I'll find out tonight whether or not the order gets filled or cancelled.

If the order does go through I'll then watch with interest how the Tesla share price performs during 2021. My guess is that it may drop back to around $400 if there is any substantial bad news (eg. another quarter of losses, or EV sales below projections) or if the stock market has any general weakness.

No matter what happens, my position is quite small in proportion to my NW, so this is really only a bit of a fun gamble with 'play money'. I don't gamble more than I can afford to throw away.

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