Tesla’s epic rally and the cult of Elon
On Tuesday February 4, 2020 Tesla shares exploded to the upside to $968.99 at 3:47 pm only to drop from the highs by $81.93 in the final minutes before the close to $887.06. Tesla shares had ended the day on a six day run gaining 59%. On the following Wednesday the stock price fell 17.2% to $734.70.
After Wednesdays close I read that the legendary Steve Eisman had covered his Tesla short position that he had held since July 2018. “Everybody has a pain threshold. When a stock becomes unmoored from valuation because it has cult-like aspects to it, you have to just walk away,” Eisman said.
I too was on the wrong side of what became this Tesla video game and covered a quarter of my short position as I watched Tesla shares rocket up $180 as the panic mania peaked. I took solace in the fact that Eisman, a mentor of mine had been short Tesla. Steve Eisman has made a name for himself and when he talks the investment community listens. Now that Eisman has “killed his money-losing bet” against Tesla leaves all shorts feeling more vulnerable.
On that same Wednesday one of Tesla’s most vocal cult members Mrs. Cathie Wood was making one of her daily TV tour appearances on CNBC’s Fast Money. Mrs. Wood is an investment adviser (Ark Invest) with the Securities Exchange Commission since 2014. It seems Mrs. Wood has been coming out with a higher price target every few days of late and on this Wednesday she was making her case for a bullish price target of now $15,000. Looking back at Cathie Wood’s rising scale of price targets leaves one guessing what she will have to put out for an encore- 20,000, 50,000? Leaves one feeling your at an art auction full of wealthy buyers driving up the bid in the Hampton’s.
When Fast Money trader Karen Finerman asked Mrs. Wood how she supported her $7000 moderate case valuation, Mrs. Wood responded “we don’t operate like that, we figure out the cash flows then discount them.” Cathy Wood then said that “Tesla is ready for prime time-it’s like the Falcon Rocket Cathy Wood said, “failure, failure, failure, failure, success!”
Mrs. Wood then touted that Tesla had increased it’s share of the EV market from 17% in 2018 to 19% in 2019 in the face of competition. This is understandable given the success of the model 3 accounted for 1/8 of the world’s EV sales in 2019. She then went onto say that auto analysts don’t understand how to value Tesla and didn’t understand Tesla’s lead in software and user/ vehicle data and auto pilot self drive capabilities and that the competition didn’t come close in range.
Coming in at a lower price point than the model 3 both the Chevy Bolt and Kia Niro today have the same range as Tesla’s model 3. Chinese EV manufacurer NIO today has five EV models including the EP9- the fastest autonomous electric car in the world. NIO reported an increase of 31% in it’s EV sales in Q4 in the face of a global recession in auto sales. Global auto sales have been on the decline since 2017 (95.2 million), 2018 (94.4 million), and 2019 (90.3 million). This surely presents a headwind at a time when competition that we would agree has been slow to arrive, will eventually at a minimum lessen the advantage Tesla currently holds in the global plug-in electric market share that today sits at 2.2% of total auto sales.
The competition has been slow but this battle has only begun. While Elon Musk is the master at over promising and promoting, competitors of all sizes are sure to soon make an impact when it matters in a race that is just beginning. Larger producers GM and Volkswagon sold a combined 18 million cars in 2019 versus Tesla’s 367,500 sales. These big incumbents have sat back and allowed Tesla to lose money building out a market that they surely want a big piece of if they are to survive. 367,500 Tesla consumers almost 3 million EV buyers have spoken and the auto industry needs to be in if they want to be around for the remaining 97% of future EV penetration.
Despite record deliveries for Tesla in 2019, GAAP net loss was $862 million down from a GAAP net loss of $976 million in 2018. Despite what all the Tesla cult members are saying, 2019 saw higher deliveries and net income dropping lower in Q4 meaning that the more cars they sell the less money Tesla makes.
I will address the multitude of competitors that will be part of the EV fight in a separate letter but will address the Lucid Air that is to come to market later this year. Lucid CEO Peter Rawlings said this week that “Tesla hasn’t cracked it. We can take it to a whole new level of range and efficiency.” By the way, Rawlings was the chief engineer of the Tesla model S project from 2009-2012 before going out on his own to start Lucid, backed by Chinese and Saudi Investors. The Lucid Air will be the first model to market from the company. A luxury all-electric sedan with a base price of $60,000 and uses an over 900- volt system over Tesla’s 400 volt on the S series. Rawlings went on to say that Lucid will bring electric cars “to a whole new level of range and efficiency” coming out of the gate with an over 400 mile range. Just last week Tesla CEO Elon Musk said that Tesla is getting close to making it’s Model S a 400- mile electric car.
Tesla cult members don’t want to acknowledge anything that doesn’t fit their story or relm of reality. It is almost laughable to watch analysts Adam Jonas from Morgan Stanley defend himself sticking to his under perform rating and $360 price target while Brian Johnson from Barclays raises his Tesla price target to $300 per share from $200 per share.
None of the realistic headwinds for Tesla matter as the stock has “un-hinged” from reality as Steve Eisman said. Dreamer millennial’s again are buying fractional shares online on the likes of Social Financial and Robinhood. This passive new buyer will present problems to markets going forward as they chase the latest themes. Before the marijuana stocks crashed four pot stocks made the top ten holdings on Robinhood’s free trading app, a trade that resulted in deep losses for all that bought that mania and believed that we would all be eating marijuana for breakfast every day.
For now the Tesla bulls are winning and have been winning since October 2019 and nothing else matters. It doesn’t matter that Tesla EV registrations declined by more than 40% in California in January. It doesn’t matter that global auto sales are in a recession and that the Coronavirus will surely result in even slower demand in what was the big story just weeks ago as Tesla bulls ignore the shut down of all of Tesla’s stores in China including the Shanghai factory built impressively in yes, less than one year.
Pay no attention to the loss of credits and subsidies in the US and other markets. Believers will continue to believe that the over 130 models that are projected to come to market will all fail and fall short of the Tesla standard and none of the new entries will successfully integrate software services to their EV’s. And Tesla who has been charged in the past with violating national labor laws will continue to successfully fend off and terminate any pro-union workers allowing Tesla a big competitive advantage over the incumbents that earn a profit while having to carry the weight of the United Auto Workers Union. Here I give Tesla the tailwind in opening their Shanghai factory where labor laws are lax and non existent. But the incumbents are already there and China is the biggest market.
For the dreamers to dream the economy will never follow the global auto market and the U.S. will never enter into recession as Tesla buyers will continue to line up with $100 deposits and $2,500 down to walk away with essentially a home on wheels at a starting purchase price of $115,000. With auto loan defaults at record highs the economy will not be able to falter effecting the $1,400.00 monthly payments on Tesla’s model X or S. Let’s hope the Fed keeps rates low forever and keeps pumping easy money into the system as the used Tesla market continues to build. Take a look at the used Tesla resale market and it is common to see Tesla’s reselling in the $80,000 range. The problem is that sellers are not going to let you walk away with their Musk mobile in exchange for $2,500 down. No one is talking about the easy and aggressive financing that is supporting car sales on a house of cards.
Longtime consumer advocate Ralph Nader has been rightfully sounding the alarm bells to the SEC to pay attention to the protection of investors. He is referring to the week that was and all that is wrong with the disconnected stock swings. While the SEC is in a permanent ambien induced sleep, Robinhood investors are boasting online of making tremendous options trades that no one seems to care about traders ability to clear these transaction. Trading Tesla has become a video game and the SEC should investigate potential market manipulation and possible insider trading. After all with Tesla now having a valuation above 100 billion, at play is a pay package that in a Tesla proxy statement can pay Elon Musk as much as $ 55.8 billion if the market valuation remains above $100 billion for a set time period. “When the stock market bubble implodes, it will have been started by the surge in Tesla shares beyond speculative zeal” Nader said.
FEBRUARY 2020 CAVU OUTLOOK:
LONG: Buy
(GM): NYSE General Motors Co. $ 32.00
(LIT): ARCA Global X Lithium & Battery $ 30.30
(PLUG): NASDAQ Plug Power Inc. $ 4.00
(ALB): NYSE Albemarle Corp $ 84.00
(NIO): NYSE NIO Motors $ 4.00
(ABX): TSE Berrick Gold Corp. 18.43
(SQM): NYSE Quimica Y Minera Chile ADR 29.00
(BP): NYSE BP PLC ADR 37.93
SHORT:
(TSLA): NASDAQ Tesla Motors $ 740.00
(HYG): ARCA iShares High Yield Corporate Debt 81.48
(HCG): TSE Home Capital Group Inc. 14.40
(CM): TSE Canadian Imperial Bank of Commerce 101.68
(RY): TSE Royal Bank of Canada 93.44
(XRT): ARCA S&P Retail ETF 40.83
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CAVU Investments | William Pimenta | Copyright 2020
