Saturday, February 8, 2020

Burn your shorts

Short-sellers sell shares/markets/commodities/currencies/bonds they don't own with the intention of buying them back later at a lower price.  This is  risky.  When you buy a share, at say $50, your maximum loss is the $50, because zero is the furthest the price can fall.  But if you sell a share you don't own for $50, it's possible that the share's price could rise by much more than $50.  In fact, theoretically, the potential rise in price is infinite. 

Tesla has been the most short-sold stock in the world.  A string of "experts" has been vocal that Tesla has been going to fail, and they have assiduously spread stories that Tesla was running out of cash, that it couldn't produce the Model 3 at scale, that it would never make a profit, that there were "Tesla killers" (cars just as good as Tesla's, produced by competing manufacturers) waiting in the wings, ready to crush Tesla's sales, that its first giga-factory in Nevada would never be built and would never make money.  And so on and so on.   But Tesla has started making a quarterly profit, it has started producing the Model 3 at scale, its new giga-factory in China has been built from scratch in record time (China is the world's largest car market).  It's obvious that Tesla is going to not just survive but to thrive. 


Tesla shares have soared 40% in two days, after one US analyst predicted the electric carmaker could transform global transport and that its market value could soar to $1.3tn (£1tn) in less than five years.

Shares in the 17-year-old California company rose by 17% to $912 a share on Tuesday, giving Tesla a market value of $164bn – more than the $104bn combined value of Detroit’s big three: General Motors, Ford and Fiat Chrysler.

The share price surge on Tuesday came on top of a near-20% rise in the stock on Monday. It has now more than doubled since December, as the company has reported stronger-than-expected sales and analysts predict it will streak away from traditional car companies in the development of electric vehicles.





The extraordinary spike in the company’s value sets Elon Musk, Tesla’s maverick founder and chief executive, further on the path to collect up to $50bn in the largest corporate pay deal ever struck. Musk, who is already the world’s 22nd-richest person with a $41bn fortune, will collect the “staggering” bonus if Tesla becomes a $650bn company by 2028.

Tesla is now the world’s second most valuable car company behind Japan’s Toyota, which has a market capitalisation of $227bn. Tesla’s huge valuation is despite it selling just 367,200 cars last year, compared with Toyota’s 10.7m sales. Tesla has never made an annual profit, and lost $862m in 2019.

Despite this, bullish financial analysts reckon Tesla’s value will surge higher still. They expect the company to dominate the electric car market as global governments outlaw the sale of polluting cars. The UK on Tuesday announced that it would ban the sale of petrol, diesel and hybrid cars by 2035. Tesla is also expected to make billions from fleets of self-driving autonomous taxis.

Catherine Wood, the chief investment officer of ARK Invest, said buying Tesla shares should be a “no-brainer”. ARK, which has long been one of the most bullish on Tesla’s potential, said it expected the shares would rise to $7,000 by 2024, which would give the firm a market capitalisation of $1.3tn. That would put Tesla behind only Apple (currently worth $1.4tn) and Microsoft ($1.37tn) among the world’s biggest companies.

According to ARK, the possibilities could be even greater: its $7,000-a-share price target is only a “base case”. The firm’s “bull case” predicts a price as high as $15,000. In the firm’s worst “bear case” scenario the shares are still expected to rise to $1,500.

However, other analysts are highly sceptical of ARK’s calculations and projections. “I just can’t believe this freaking stock. It’s insane,” the Roth Capital analyst Craig Irwin told CNBC on Tuesday. “This is a big separation from those of us who like to pull out the calculators and look at reality.”

Wood told Barron’s Market Brief: “The electric vehicle is going to drop below the price of a gas-powered vehicle, like-for-like, within the next 18 months to two years, and then will continue to fall. So it’s going to be a no-brainer. ”

ARK said it expects electric vehicles to account for about one-third of all car sales within the next five years, and Tesla would dominate the market. In its worst-case scenario Tesla is expected to sell 3.2m cars a year by 2024, and 7.1m in the best case.

James Anderson, a partner at Baillie Gifford, the Edinburgh-based fund manager that is one of Tesla’s largest outside investors, said: “We’re thrilled with their progress, delighted that our patience seems to have paid off – and, far from least, extremely happy that electric is beating carbon.”

Anderson had been mocked by some when a year ago he predicted: “There is now quite a large and growing possibility that Tesla will be the most valuable company in the world.”

Gene Munster, a managing partner of the venture capital firm Loup Ventures, said: “The thesis for Tesla’s business miracle is rooted in the handful of years that the company operated with effectively no competition.

“Tesla has nearly a decade head start in EVs [electric vehicles] as other automakers under-invested in the space,” he wrote in a research note.


[Read more here]

If you sold Tesla short at $200 you will by now have lost 4 times that.  In fact, of course, the jump in the share price was partly caused by short covering, where short sellers were obliged to cover their shorts by buying shares in the market.  And the rise in price caused by short covering meant that more shorts had to be covered, leading to further rises.    The shorts have been burnt.

The Tesla haters are still out there, and no doubt new stories about imminent "Tesla killers" and "Tesla fails" will be bruited abroad.  But I have no doubt that Tesla will continue to thrive.  That's not the same thing as saying I believe that the current share price is justified.  After the huge spike we have seen over the last couple of months, it would be quite normal for the price to fall back, short term.   And as usual, I can make no recommendations about whether to buy the shares or not.  You must do your own research, and make your own decisions. 

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