- In 2017, I argued that it was pointless to short Tesla.
- Shares were then at around $400.
- Following a recent, epic rally that's taken Tesla to nearly $1,000 per share, the short case has returned, despite traders getting burned.
- But it's a still a bad idea to short Tesla.
- Visit Business Insider's homepage for more stories.
Several years ago, when Tesla stock went on a tear and ripped through a 2014 high of about $300, I wrote a story about why shorting the company was a terrible idea.
"Here's the thing: shorting Tesla is a waste of time," I argued at the time. "As much as being long Tesla is an emotional proposition, couched in a largely unreal story of a vast disruption of the entire global car business by a single, small company ... wanting Tesla to collapse is simply a bleak, reactive counter-narrative."
I should admit that at various points since 2017, as Tesla has lurched from sub-$200 share prices to nearing $1,000 and minting a market cap that makes it more valuable than the VW Group, shorting the carmaker has paid off. The truth is that shorting Tesla as a trading strategy, using various sophisticated financial instruments, is probably worth it for professional money managers.
Nonetheless, while the more ruthless market pros know when to hold 'em and know when to fold 'em, Tesla has traditional attracted a more apocalyptic contingent on the short side. Since I offered my anti-short case in 2017, this bunch has coalesced into a community of sorts, using the twitterized shorthand #TSLAQ to show their enthusiasm not for Tesla's stock going south, but for the entire enterprise going to zero.
#TSLAQ forever!
With Tesla at around $850, the bankruptcy gang remains, impressively, undaunted. I'm not entirely unsympathetic, by the way. The share price is nonsensical, even if you think electric-vehicle sales might somehow rise above an anemic 2% worldwide, and that Tesla could capture three-quarters (or more) of future market share. As a bet on the future, it's a dumb bet: Tesla's over-the-horizon profit margins are unlikely to be industry-beating, given that much of the net income could be consumed to support near-monopoly share in a tiny market.
That isn't to say Tesla has a bad business. Tesla has a pretty OK business, at least on the car-selling side. It is, however, to say that Tesla balance sheet should come under constant future stress. That why, even with a few quarters of profits under its belt, the company announced yet another capital raise, to the de-risking tune of $2 billion.
You would be wrong to think that this all makes Tesla into a perma-short opportunity. Long-term, shorting Tesla has been a catastrophically awful strategy. The return to investors, since the 2010 IPO, has been over 3,200%. The math is staggering. If you'd bought one share of Tesla for kicks in 2010, when it was around $20, and simply forgotten about it, you be setting on a 45X gain.
Tesla has been, for investors who waited for the big dips or who got in quite early, among the greatest buy-and-hold stocks in the last ten years. History is a stern judge: it's basically never been a bad move to buy Tesla when it's been "cheap."
Tesla still has a lot of issues
Bear in mind that Tesla could certainly be cheap again - cheaper than it currently is. The business is stable but unpredictable: Tesla has shown that it can build and sell more cars, but it simply isn't big enough to spread around the trouble. Established automakers, for example, can rely on the seemingly forgetting nature of credit-versus-commodity markets to deal with downturns.
General Motors has been struggling with its South American business, but flowing credit in North America has kept the profits going. A recessionary credit pullback in the US would logically be offset by better commodity conditions in South America, reviving that business and given the Detroit giant some compensation.
In fact, if there is a reason to short Tesla, it's as a hedge against a downturn in the US. Tesla's entire story have effectively taken shape during a long boom for auto sales. Since 2015, the US market has been running at record or near-record levels, and while Tesla's share price was expanding, the company was able to provide affluent customers with a appealing $7,500 federal tax credit.
But that's not really a very active attitude to take. With US unemployment as low as it's been since the 1960s, the Federal Reserve continuing an market-boosting interest-rate approach, and car companies making bank by selling pricey pickup trucks and SUVs to America buyers, it would take another financial crisis to bring widespread ruin.
What's more likely is a slow erosion of auto sales, possibly a larger drop if the entire economy slides into a normal, business-cycle recession (there hasn't really been once since 2008-09).
The upshot, then, is that it was a bad idea to short Tesla at $200, at $400, and even now at $900 or whatever. The "bleak, reactive counter-narrative" that motivates Tesla skeptics has been thoroughly discredited. Find something else to wager your money on.
