TSLA Market Action: 2018 Investor Roundtable

[Todd Burch]

In the last 12 hours I’ve seen talk of Tesla strapping rockets or thrusters to Roadster 2 and talk of $30k share price.

Now that we’ve got that out of our systems, let’s come back to earth guys. C’mon. We are not Elon’s Roadster. Let’s try to stay a little grounded here .

 

[Ellec]

I think it's worth mentioning that this short interest vs share price chart can be easily misinterpreted - the old "correlation is not causation" problem. Commonly this chart is used to imply that high levels of shorting will result in future increases in the share price, since these variables appear to move in opposition and historically we have seen big swings.

However, a number of a possibilities exist besides the idea eventual short covering will boost the price. For one, the price could rise for other reasons and then shorts could decide to cut their losses and cover. So covering remains correlated with share price appreciation, but isn't causing (or fully causing) the appreciation.

Alternatively, the share price might never appreciate but rather trend to zero as the shorts hope. Thus shares shorted continues to climb and the price declines, so the correlation holds very well but not in the direction that bulls are hoping for.

Certainly it is well established that short covering does exaggerate upwards movement in the share price, but it alone isn't going to cause a huge increase in the share price. After all, the bears are quite convinced they are right and they aren't going to panic and cover for no reason. Major changes in the share price - good or bad - will start based on news and results, and then shorts will continue to amplify these moves in both directions. So a more valid take away from this chart is that if bulls do get the good results they are hoping for, then the upward movement could be quite exaggerated by covering. If we get bad news, shorts will continue to sell into that and exaggerate the decline (like they did in early April). So in other words, the stock will be volatile.

Shorts always cover at some point, they get margin called or puke their position at the pain point. There is a price where a lot of shorts will get liquidated, this will cause millions of buy orders to hit the market and consume liquidity further pushing price up, causing more shorts to liquidate etc. etc. etc. This is a short squeeze. If 40% of the float is short can you imagine what happens when price exceeds all time highs? Price could spike to over $1000 if longs aren't willing to sell.

 

[jhm]

You and others likely take this for granted, but for some it may be necessary to state that this number is annual...

Yes, thanks for clarifying.

 

[YasB]

So was yesterday's action due to short covering, anyone a view on this? ...
Then I'm wondering who is going to be prepared to sell to shorts, which long would bail-out at this point?

I'm sure it partially was because of some shorts covering. As always you have short, medium and long term traders on both sides. Tesla breaking through 300 with a lot of power surely triggered some Stop Losses and kicked out some of the shorts relying on Technical Analysis or trying to swing trade the stock while it was range bound below $300. I'd also assume that some of the "Tesla will go BK soon" bears have increased their short positions around Q1 numbers and the conference call. It's easy to get greedy, think "now is the time! finally they'll go broke" and double down. Short interest spiking some weeks ago is indicating that may have been the case.

Regarding your question which long would sell shares: Probably the guys trading short or medium term on the long side. Wasn't somebody writing yesterday he was taking profits of his short term trade to soon? Another group may contain people that entered around $380 last year, averaged down over the last months and want to decrease their position. It's not like every long always buys more with the plan to hold it forever. I'm pretty convinced the TMC market action crows is not representing the "average investor" in Tesla.

For the next 1-2 years if we add up the potential revenue of their current major projects (Model 3 and Model Y), an annual revenue of $100b looks within reach - and that's just automotive, ignoring energy storage and solar. That's about half of Apple's revenue of ~$200b, and if we take a similar valuation model then if Apple is a trillion dollar company then Tesla is a $500 billion company. Given that TSLA market cap is round $50 billion right now, it would imply a fair share price somewhere around: $3,000, again without any growth premium. https://www.reddit.com/r/teslamotors/comments/8o381s/who_killed_the__car_and_when_will_the/

Sorry ... but ... uh ... lol. Apples gross margins of > 40% over all segments including the less profitable stuff translate into net margins of about 25% and quite some billions in net profit. Apples valuation also includes a sh.tload of cash they have on hand, imho like 300B or so right now? So why would you apply Apples multiple to Tesla? Maybe lets look at it from the other side: At $500b Teslas valuation would be in the region of the combined value of BMW, Daimler, VW Group, Ford, GM and Toyota. Together they build in the order of 40 million cars per year and generate something like $50+ billion net profit per year. And here you have some guy at Reddit telling you, with revenue of $100B and something like 1-2 million cars sold, Teslas fair price would match that valuation. Of course that's not include any growth premiums ... how is that not ridiculous? Damn ... brb ... got to change trousers.

Price could spike to over $1000 if longs aren't willing to sell.

That would be a perfect entry point for a much larger short position. ;-)

 

[Tslynk67]

That would be a perfect entry point for a much larger short position. ;-)

Not if it goes to 30k it's not

 

[Ellec]

I'm sure it partially was because of some shorts covering. As always you have short, medium and long term traders on both sides. Tesla breaking through 300 with a lot of power surely triggered some Stop Losses and kicked out some of the shorts relying on Technical Analysis or trying to swing trade the stock while it was range bound below $300. I'd also assume that some of the "Tesla will go BK soon" bears have increased their short positions around Q1 numbers and the conference call. It's easy to get greedy, think "now is the time! finally they'll go broke" and double down. Short interest spiking some weeks ago is indicating that may have been the case.

Regarding your question which long would sell shares: Probably the guys trading short or medium term on the long side. Wasn't somebody writing yesterday he was taking profits of his short term trade to soon? Another group may contain people that entered around $380 last year, averaged down over the last months and want to decrease their position. It's not like every long always buys more with the plan to hold it forever. I'm pretty convinced the TMC market action crows is not representing the "average investor" in Tesla.



Sorry ... but ... uh ... lol. Apples gross margins of > 40% over all segments including the less profitable stuff translate into net margins of about 25% and quite some billions in net profit. Apples valuation also includes a sh.tload of cash they have on hand, imho like 300B or so right now? So why would you apply Apples multiple to Tesla? Maybe lets look at it from the other side: At $500b Teslas valuation would be in the region of the combined value of BMW, Daimler, VW Group, Ford, GM and Toyota. Together they build in the order of 40 million cars per year and generate something like $50+ billion net profit per year. And here you have some guy at Reddit telling you, with revenue of $100B and something like 1-2 million cars sold, Teslas fair price would match that valuation. Of course that's not include any growth premiums ... how is that not ridiculous? Damn ... brb ... got to change trousers.



That would be a perfect entry point for a much larger short position. ;-)

Growth premium is massive for Tesla, there was a report that there could be 130 million EVs in 2030. Tesla are positioned to have a majority share of that. Then there is energy as well as any other markets they disrupt till then.

 

[Yggdrasill]

That would be a perfect entry point for a much larger short position. ;-)

Maybe, but it doesn't help much if the shorts are bankrupt.

 

[YasB]

Growth premium is massive for Tesla, there was a report that there could be 130 million EVs in 2030.

Does that relate to my post? I pointed out, that the Reddit-Poster said Tesla would be fairly valued at $3000 a share in some years, without any growth premium applied, which is pretty ridiculous. I took no stance regarding growth potential or reasonable multipliers in that post.

Maybe, but it doesn't help much if the shorts are bankrupt.

True, but I would assume there are not many experienced shorts putting more than maybe 5% or 10% of the portfolio in a single position. If a short position running in the wrong direction is bankrupting you, it simply was to big, you had no exit criteria, no stop loss, limited cash available and no time to check what happens to your position. In that case there is no one to blame but the guy entering that position. If you are using options, knock-outs or other derivatives your exposure is limited anyway. And of course all the tools available for longs, like averaging down and all the other trading techniques are available for shorts too.

 

[mongo]

And of course all the tools available for longs, like averaging down and all the other trading techniques are available for shorts too.

Only if the stock is in a short term pop. If it is semi-monotonically increasing, there is no averaging escape route for shorts (unless they short an extreme amount so as to raise their average price to near current just before a dip. However, if they time wrong, they are even worse off).

Longs investing in healthy company have no worries. Shorts investing against a healthy company have no securities...

 

[ValueAnalyst]

On yet another day of Adam Jonas nonsense, I'd like to remind everyone that this is what he predicted in November of 2016: "We continue to forecast a Model 3 launch at the very end of 2018 (more than 1 year later than company target) with 60k units in 2019 and 130k units in 2020.”

Off by 18 months.

ValueAnalyst on Twitter

 

[Dan Detweiler]

Maybe, but it doesn't help much if the shorts are bankrupt.

You mean bankwupt? LOL!

Dan

 

[lklundin]

That would be a perfect entry point for a much larger short position. ;-)

That's true, in principle.

My problem with that is, with a short you can at most gain the amount you invested, while the risk (if you get in at the wrong time) are _all_ your holdings (based on my understanding that during the squeeze your broker will automatically start liquidating your other holdings, to make sure you can honor your obligation to buy back the shorted stock).

So for someone that feels comfortable predicting (local) highs and lows, long positions seem to carry much less risk, namely the amount purchased, and (in principle) unlimited reward, so the opposite risk vs benefit.

Please feel free to improve my understanding of this.

 

[kerawits]

Wise investors never take short positions. It has limited upside but unlimited downsize and most importantly time is against you.

 

[lklundin]

here you have some guy at Reddit telling you, with revenue of $100B and something like 1-2 million cars sold, Teslas fair price would match that valuation. Of course that's not include any growth premiums ... how is that not ridiculous?

I agree that a valuation anywhere near that range would not be sustainable.

The (for some literally million dollar) question is however, during a squeeze how high could it _temporarily_ go?

 

[Starno]

Well, a lot of shorts got in or accumulated when the SP was in the 350's. So a lot of them are still in the green.
I think the SP need to go >360 to see a real amount of fear among the shorts.

Rapid increase to >350, and then a rapid increase to 380, and you could see some real panicking.

 

[bdy0627]

In the last 12 hours I’ve seen talk of Tesla strapping rockets or thrusters to Roadster 2 and talk of $30k share price.

Now that we’ve got that out of our systems, let’s come back to earth guys. C’mon. We are not Elon’s Roadster. Let’s try to stay a little grounded here .

Where can I find some J20 $30k LEAPs?

 

[jeewee3000]

That's true, in principle.

My problem with that is, with a short you can at most gain the amount you invested, while the risk (if you get in at the wrong time) are _all_ your holdings (based on my understanding that during the squeeze your broker will automatically start liquidating your other holdings, to make sure you can honor your obligation to buy back the shorted stock).

So for someone that feels comfortable predicting (local) highs and lows, long positions seem to carry much less risk, namely the amount purchased, and (in principle) unlimited reward, so the opposite risk vs benefit.

Please feel free to improve my understanding of this.

What you said is only true for pure shorts (=no leverage) or stock holders.

Many shorts (or longs), such as momentum traders, try and ride waves of bullish / bearish sentiment and do this via leveraged positions. This way you can earn way more than what you invest as a short.

Higher risk, higher profit.

 

[jeewee3000]

Where can I find some J20 $30k LEAPs?

I heard they're currently at $0,01. Way overpriced

 

[bdy0627]

On yet another day of Adam Jonas nonsense, I'd like to remind everyone that this is what he predicted in November of 2016: "We continue to forecast a Model 3 launch at the very end of 2018 (more than 1 year later than company target) with 60k units in 2019 and 130k units in 2020.”

Off by 18 months.

ValueAnalyst on Twitter

I gotta wonder what is still causing him to doubt 5,000/week production for so long at this point. He is even now predicting it will not happen for another 12 months??? He clearly thinks Elon is fibbing at this point. Didn't he get a factory tour just a few months ago? Hmmm. I realize he has been all over the map with his predictions, but I find this quite puzzling.

 

[jelloslug]

While on the surface this analysis seems ridiculous, what people continuously forget to mention (even in this article) is that Tesla is not just an auto manufacturer like all the others. They are creating a whole new infrastructure. A personal power company with the ability to go from the sun, to solar, to storage, to house, to car. That is something that has never before been seen. They are preparing to change the way we look at the trucking industry as well. They are also prepared to offer a whole new market of power grid stabilization. They have all the products in place. The cars are just one piece of the puzzle. They are positioned to disrupt, not just the auto industry, but the trucking industry and energy industry as a whole.

$30k stock prices may very well prove to be highly optimistic but when looking at the bigger picture it suddenly becomes much more plausible.

Dan

Tesla is on the verge of being Ford and Standard Oil plus some other companies all at once.