When do qualitative/quantitative beliefs converge
Alright guys, thanks for the encouragement. Just want to clarify though, I'd like nothing more than critical feedback. My aspiration is to be able to test our thoughts/theses on our TSLA investments so we can be informed and make better decisions.
So, I'll continue on some thoughts I left off on earlier this morning.
I'm thinking there might need a convergence of beliefs regarding TSLA in order for volatility (and short interest) to wear off. As long as there's such division and wide dispersion of beliefs (ie., $80 vs 200 price targets), then this only encourages both shorts and longs. It also leads to the inevitable sentiment battles to sway the stock in up/down directions.
So, I was talking with my wife last night about the theory of dispersion of beliefs and short interest. I was thinking what would it take for the dispersion of beliefs to converge, meaning when will the quantitative and qualitative folks all join together in peace and harmony (ok, kind of joking here... what I mean is when will they sort of agree regarding Tesla and its valuation). When, I look at Google's IPO in 2004, it seems like there were a lot of skeptics at first, but then after their IPO every quarterly ER would be blowout revenue and earnings. Google's revenue/earnings growth rate was astounding. After a year or so, people (both quantitative and qualitative) started to converge in their thoughts regarding GOOG. Though there were disparities, both camps saw the trajectory of GOOG since it was undeniable. Qualitative folks got in to GOOG first, but later quantative folks came around after the numbers kept improving (Note: if you were invested in GOOG at this time would love to hear your perspective on this.).
So, with Tesla I'm thinking that Tesla's numbers (revenue, units, profit, margin, etc) need to keep improving and improving at a rapid pace in order to win over the quantitative folks. When the quantitative folks see quarterly revenue/profit/units/margin increasing at a rapid rate, then that's something they can get behind... and they can raise their price targets accordingly. Now what we have with Tesla is currently they're production constrained. So, while they are focused on improving gross margin to 25% by the end of the year (which will be very impressive to quantitative folks), they are constrained on how fast they can ramp revenue and units delivered. In the meantime, the stock keeps rising. Thus, the numbers aren't convincing enough for the quantitative folks to get behind the massive stock price rise.
On the other side, you could make the argument that quantitative folks need only to look at revenue from 2011/2012 and compare that to revenue in 2013 for them to become convinced at Tesla's growth. But I'm not convinced that that will be enough. I think that the quantitative folks really need quarter-by-quarter reassurance that the numbers are significantly improving, and this gives the quantitative basis for them jumping on board to justify the high valuation of the company.
So, the question becomes when will Tesla reach the point when they can demonstrate significant enough quarterly growth (ie., revenue, units, etc) to "win over" the quantitative folks? And the other challenge is that the greater the stock price, the greater the quarterly growth needs to be to "win over" the quantitative camp.
According to Q2 ER, it appears that Tesla is significantly production constrained and the constraints are regarding suppliers (something that is not in Tesla's full control). Tesla needs to overcome bottlenecks by waiting/helping current suppliers ramp up, choosing new suppliers, or moving some more productions of parts in-house. The result of these production challenges is that it's unlikely that Tesla will blowout revenue or units delivered for Q3 or Q4.
It appears that Elon is forecasting production constraints will be largely overcome in Q1/Q2 of 2014 and that they will try to test the limits of Model S demand sometime in 2014. As production constraints get overcome, Tesla will be able to ramp production and by ramping production this will significantly increase revenue, which is what's needed to win over the quantitive folks like Archambault from Goldman (and others). (Note: the other way for the quantitative folks to be won over is for them to be more open to the qualitative aspects of Tesla/Model S. For example, for Archambault and others to realize how much better the Model S is than its competitors.)
Another possibility is that Tesla reaching 25% gross margin might be enough to win over a lot of the quantitive camp. I think this could be the case, but I'm not sure if it'll do the complete job. I think it solidifies Tesla as a luxury niche automaker in the eyes of the quantitive camp, but doesn't justify Tesla's market cap (as a potential mass market car company).
IMO the 25% gross margin goal might actually encourage more qualitative folks to jump in. I think the combination of the Model S being an awesome car and the fact that Tesla is proving it can execute (w/25% GM), will encourage new investors to jump on board.
(Side note: the qualitative folks drive a Model S and exclaim, "The writing is on the wall! Tesla just needs to shrink this and make it cheaper, and they'll take over the world!" The quantitative folks look at the challenges of mass market auto production, the competition, the reality of low margins downstream, etc. and see Tesla's chances of escaping the niche luxury market and going mass market as slim.)
So, I'm currently thinking that as Tesla ramps up production in 2014, the growth in revenue quarter-to-quarter might enough to win over more in the quantitative camp and we might see more convergence of beliefs regarding Tesla.
However, I'm also thinking that there could exist a large dispersion of beliefs even until Gen III. The reason being is that Gen III is a concept. Tesla doesn't even have a prototype yet. As a quantitative person, imagine what reason would you give for a super high TSLA valuation when Tesla doesn't even have the Gen III in production yet. The quantitative person isn't betting on concepts and promises. They want to see real products with real revenues and real quarterly growth. Thus, until Gen III comes out and kicks the BMW 3 Series butt, I can still imagine for people to have a wide range of opinions and beliefs regarding Tesla. This will only be exacerbated if the stock price rises.
I think a Gen III prototype might help some quantitative people "imagine" what Gen III revenue and demand might be like. But it will still be a stretch. I think a Gen III prototype actually might help more qualitative folks become new investors in TSLA as they get excited about how awesome a car Gen III will be and how it can potentially dominate the BMW 3 series market (and beyond) eventually. So, a Gen III prototype might win over some quantitive folks but it will also draw in new investors in the qualitative camp, thus probably raising the stock price. The higher the stock price, the more reason the quantitive folks will have to be skeptical and to think the stock is overvalued. Thus, the dispersion of beliefs continue.
So, when does short interest return to decently normal levels (ie., at least under 10mm shares)? I don't have a clear picture. I think it first needs to dip under 15mm shares for us to see significantly lower amount of volatility. This could happen with 25% GM (or sooner), or it could happen with ramped production in 2014. It could happen later (if Gen III prototype pushes stock price even higher by qualitative folks). On the other hand, it could happen sooner than I'm expecting (ie., within next couple months?) if somehow pessimistic folks capitulate to the qualitative aspects of the car/company/ceo. But I'm not seeing that as likely. The more people pump Elon Musk as the next Tony Stark (or whoever you want to compare him with), the more it gives room for people to take the other side and say it's fluff and premature.
In summary, as long as there's a wide dispersion of beliefs regarding Tesla and its valuation, I think it seems like we'll see continued strong short interest (ie., above 15mm shares) and continued volatility (in both directions, but IMO trending up over time).
This has been noted before, but there remains a lot of weak and/or misguided information out there about Tesla. Part of it I think is natural because with a new technology (EV) and a new company, there's natural confusion trying to figure out how profound (or not) the impact of the new tech/company will be. I also think the "short TSLA" movement also is partially responsible for this as well. They appear to be aggressively emailing and contacting media outlets spreading their negative propaganda (based on weak information) to media outlets, reporters and analysts.
I think over time, correct and better information is bound to get out more (especially as more owners spread the word of how awesome their cars are). The greater the accuracy and quality of the information out there, I think we'll see a greater convergence of beliefs surrounding the company as well. This will also contribute to a reduction of volatility and short interest.
I was thinking that accurate/better information is already penetrating media outlets very quickly and that this would converge beliefs and reduce short interest and volatility. However, the high short interest (7/31 settlement date) got me thinking that there's still a lot of poor information out there and wide-ranging opinions on the company and valuation. So, my current thinking is that prior to let's say a couple months ago, I'd say the TSLA qualitative optimists were far and few on media. But now, media is catching on and you have a lot more qualitative optimists on TV, web, newspapers, etc. than before. However, I'm thinking there are still as many quantitative pessimists as there are qualitative optimists in mainstream media. Thus, demonstrating the wide dispersion of beliefs that keep short interest high.
But we'll see. If short interest dramatically drops, then that might be a sign that TSLA opinion is converging (and this could be a result of better/accurate information getting out there). If that happens, then volatility will likely decrease as well. So, I'm not ruling out that volatility decreases in the coming weeks (as well as short interest), but I'm just not expecting it. Currently I'm expecting volatility and short interest to remain fairly high for the coming months. If this is the case, I think it might present some interesting buying/trading opportunities.
Anyway, I share these background processes that shape some of my views on the stock price/prospects, so it can benefit some but also so I can receive some critical feedback. Cheers.
