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Why are there still shorts!?

Discussion in 'TSLA Investor Discussions' started by Clprenz, Apr 25, 2013.

  1. Clprenz

    Clprenz Member

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    #1 Clprenz, Apr 25, 2013
    Last edited by a moderator: Apr 26, 2013
  2. ipdamages

    ipdamages Roadster Sports 835 & 972

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    There is in my opinion a good chance that Tesla will drop a bit in the next few weeks. Three reasons.

    1. Big runs often take breathers.

    2. While Tesla is going to make a profit in 1q13, it is in large part due to a one-time, non-recurring gain. So the profits to support this stock price if the company were stable are far off.

    3. The market shows several indicators of being overbought. It is hard to imagine the S&P will hit 1700 before it hits 14500 again. Increased individual tax rates hit consumer spending power, etc.

    Long term I like Tesla. Short term I think it will take a step back before continuing its ascent. I previously was concerned about adding 20,000 new Model S customers per year, but I am now a believer (esp considering the impact of adding foreign markets and the Model X).

    But Gen 3 is the question. If they can do it, we will be asking ourselves why we didn't buy more when we could for these prices.
     
  3. derekt75

    derekt75 Member

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    Why are there shorts?
    Audi is an established and growing car company that sells 1.5 million cars per year and a P/E of 6.
    Tesla is a startup fast growing car company that sells 0.02 million cars per year and has a P/E close to 0 if not negative.

    How should Audi's market cap compare to Tesla's? 75:1 in car sales? but then Tesla is a lot more risky, so maybe 100:1? but Tesla sells more expensive cars, so maybe 50:1? and Tesla is growing much much faster, so maybe 10:1?
    I don't know; you tell me, what's a reasonable ratio?

    My gut tells me that today's 6:1 ratio between Audi's market cap and Tesla's market cap is out of line.
    If I had a choice between 0.001% of Audi or 0.006% of Tesla, I would think that taking Audi would be the more sound financial decision. Maybe I'd feel better about the world owning TSLA, but I wouldn't think it as valuable.

    When could Tesla possibly have 1/6th of the operating income as Audi?

    I think Tesla is a great car company. I think it will succeed. I love my Tesla. I think the EV market is going to grow like crazy.
    but all that doesn't mean that TSLA is a buy.
    Price matters.

    I have no position in any individual stocks and I only buy mutual funds. But if I did buy stocks, I can't imagine I'd think that TSLA was a good buy at $54.
    I feel like we spend too much time talking about how great Tesla is without spending enough time discussing what a reasonable dollar figure is for that greatness.

    my $0.02,
    Derek
     
  4. kenliles

    kenliles Active Member

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    If Tesla succeeds making Audi's current entire line obsolete, $500/share;
    If they completely fail, less than your $0.02;
    Early successes so far - $54; more than your imagination can stand
     
  5. derekt75

    derekt75 Member

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    More than my imagination can stand?
    I can imagine $500/share, and I can imagine $0.02/share.
    I don't think either of those is a fair valuation of the stock.
    A reasonable valuation of a stock should include more than imagination or tales of early successes, but rather some numbers.
    Those numbers preferably explain how much earnings one can expect over the next dozen years, but in the absence of that, I think comparisons to other companies is reasonable.
     
  6. Zextraterrestrial

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    yep. lots of new people learning about Tesla that have never even heard of it still!
    I think Earth day did a little bump with new investors maybe?
    Tesla will take all of the major car companies if they don't get some crap together in the next few years and be more like Google
    shorting Tesla seems 'sketchy'
    buying at this level questionable
     
  7. kenliles

    kenliles Active Member

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    well I was just using your own words:
    "But if I did buy stocks, I can't imagine I'd think that TSLA was a good buy at $54"

    We've had a lot of numbers and conjecture on what they might achieve; Problem with a TSLA investment is today's numbers value it at nothing. It's a speculative investment on future numbers which have been projected ad-nauseum. I guess my position is those are good exercises to form a framework for potential. After that, it's a risk of successes and failures of execution and even more, if the market will choose to displace current competing products. I don't think TSLA is an investment for a numbers game.. My $.02
     
  8. deonb

    deonb Active Member

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    The difference is 10 years from now Audi will still be selling 1.5 million cars per year - maybe a little more. How many will Tesla be selling? How many power-trains will they be selling to other companies? What else will they be doing?

    You don't buy a growth stock that doesn't pay dividends based on what it is worth today. Because it's really worth nothing - the best intrinsic value is the book value in a liquidation, which you never see any part off anyway as a retail investor.

    April 2004 AAPL was at $12.89, and in 8 months it went up 300%. I'm sure there are a lot of people who were very glad to take profit when the stock price hit its all time high of $38.45 at the end of 2004. I'm sure even more people were skeptical of buying at $38. Wow. 300% up! Surely it can't go up any further...

    The question is whether you believe TSLA and Elon would come out with multiple hits (like Apple and Jobs did), or do you think TSLA is a one-hit-wonder (if that)? There's no fundamentals in the world that will tell you that. 10 years ago MSFT was a stable company. Still is today. Is anybody really glad about owning MSFT over the last decade?

    The advantage that we have over financial analysts out there - we know the company - at least we know the product in depth. It's like having the original iPhone in your hand in 2007 and then deciding where you want to invest.

    Do you feel Tesla is a disruptive force that will grow to the $40 billion market cap that Elon's performance review is based on? Because then it's a bargain today at $100, never mind $55. Or do you think the company will wilt and fade into oblivion? Odds are with the latter. But what does your gut tell you?

    My gut tells me that somebody in the next 10 years will come out with a 1000 mile range battery (aluminum air or whatever), which will once and for all put an end to range anxiety. And my money is betting that it's going to be Tesla - because they need it more than anyone else out there.
     
  9. anticitizen13.7

    anticitizen13.7 Enemy of the Status Quo

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    #9 anticitizen13.7, Apr 30, 2013
    Last edited: Apr 30, 2013
    There are still short sellers because Tesla is still a very high risk venture. It sure doesn't seem that way to those of us who watch the company closely, because just a few short years ago there was no Model S, no mass production, no Tesla factory, no pile of car magazine praise/awards, no Superchargers, and so on.

    The progress that Tesla has made in the past year seems astronomical, and the company seems to be on a certain roll. However, Tesla still has some big hurdles: making consistent quarterly profits, delivering Model X, delivering on its Customer Service plans, expanding the Supercharger network, and getting the Generation 3 automobile to the masses. Given these hurdles, I'm not surprised that some people bet against the company.

    I think it is more likely than not that Tesla will succeed though. The Model S is proof that they can deliver a superb product with features that no other automaker can currently deliver. Model S is disruptive to the marketplace in a way that I have never seen.
     
  10. ShortSlaver

    ShortSlaver Member

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    More like having a copy of OS X beta in your hands and just knowing that this is obviously the future. I started following Apple then (late '90's) and I feel the same way about TSLA now.

    Really though, you're more right than I am. TSLA is far beyond those days of Apple when folks like me loved their product and knew it was going to rampage. What TSLA is doing is absolutely game changing and they show all the signs of dominance that Apple did then too. Model S really is like the iPhone in that it changes everything and gives the company a massive leg-up on anyone trying to do the same thing.

    - - - Updated - - -

    Exactly right. I have stock for the long haul and I'm also playing the short game too, but I believe no matter what you've purchased TSLA at, you've gotten a bargain if you're willing to hold it for awhile. In the short term prices will go up and down seemingly for no reason. But it's going to keep going up a whole lot more than down over the next few years and an honest investment in TSLA will be a hell of a place to let some money sit for awhile.

    Great product, revolutionary product and well executed. This is what you want to be investing in.
     
  11. derekt75

    derekt75 Member

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    Yes, I saw you used my word "imagine". I can imagine $100/share stock. I just can't imagine me thinking that today's stock is worth $55 to me.

    Surely there's some point at which you would think TSLA is overvalued. Even John Petersen concedes that TSLA would be undervalued at some point. I think that the interesting question is where the most accurate valuation is. I feel that some people claim that TSLA is a buy because they like Tesla, not because they see it as providing good long term earnings for their investment. People liked tulips several hundred years ago. Others liked real estate not that long ago. Tulips were as lovely after the crash as before, and Silicon Valley land prices didn't crash because it turned out the weather here is actually lousy when everyone thought it was nice. I'm not trying to say that TSLA is a bubble. I am trying to say that to claim that a good company is a buy without considering the current market price can lead to disappointment. (and when everyone does that, then you can get bubbles).
    I feel like math-agnostic buy recommendations happen a lot on this site. TSLA may have been a good value at $40/share. but the logic of "it's gone up to $55/share, therefore why are there still shorts?" seems odd to me. Maybe $40 was undervalued, but that doesn't mean that $55 is undervalued. If there were shorts at $40, shouldn't there be more shorts at $55 (assuming I didn't miss some big battery breakthrough that will slash Tesla's costs or something).

    I understand that a growth stock should have low earnings. If TSLA's net income in the next couple years exceeds what they need to pay back in loan money, I think they're doing something wrong.
    but my point is that the company needs to grow a lot for it to be worth 1/6th of Audi.
    Even with a successful Model S, Model X, and Gen 3, will the company be generating gross profit at about 1/6th of Audi's (even ignoring that Tesla will likely have higher operating expenses as they try to grow)? I don't think so. So I believe the current price has baked into it a Model S success, a Model X success, a Gen 3 success, and then success after that, too.

    Anyway, I find the thread title to be an odd question. If the price jumped to $500/share tomorrow, would that be an even stronger reason for the shorts to cover their position? Not to me. If the price jumped to $500/share tomorrow, I'd actually break my rule of not buying/selling individual stocks, and open a short position in TSLA.
     
  12. Nicu.Mihalache

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    +1, except that we may have just stepped a bit in bubble territory
     
  13. kenliles

    kenliles Active Member

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    @derekt75 - well yeah, not much disagreement (except no way is a successful genIII baked in the current price). Other than that I think many would agree with you and that's why many have trimmed positions up here in nose bleed country and many attribute above $40-$45 to short covering. And if that's true we'll get a correction back until more progress is made. Of course this is a pro Tesla board, so most will be bullish, but I've seen many posts warning the current price is hi, excercise caution, overbought etc. (I've posted that myself) and Of course JP and followers believe almost any level valuation above $10/share is foolish. Currently the market disagrees based on pure speculation of where Tesla is going. Others know its over valued but are fine holding long positions

    Part of the problem may be in expectation. I can about guarantee by the time Tesla gets to as stable a place in the market as Audi, it will go through many bubbles, in both directions and likely very much more than this one. I've never experienced a disruptive tech be anything else. I wouldn't expect a rational valuation for Tesla for many years, because there isn't one for that long. If that's what is needed by an investor, just invest in Audi.
     
  14. DonPedro

    DonPedro Member

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    #14 DonPedro, May 1, 2013
    Last edited: May 1, 2013
    Valuation of Tesla can be done by a simple model:

    Step 1: Determine a value if successful (say $500)

    Step 2: Assign probability to that success (say 30%)

    Step 3: Multiply first number by second: (e.g. 30% x $500 = $150)

    Step 4: Apply discount rate for period to potential success (e.g. 5 years at 10% discount rate; $150/(1,1^5) = $93


    If you want to go more advanced, you add more scenarios than just $500 and $0, and assign a probability to each. For instance
    $1000 x 5%
    $500 x 20%
    $200 x 10%
    $80 x 20%
    $5 x 20%
    $0 x 25%

    Step 3 then becomes multiplying all of those and again applying the discount rate.


    It follows from the above that today's share price factors in a probability of around 20% of the company hitting $500 (or a probability of around 30% of hitting $300, if you think that is the potential). If you believe this is overly optimistic, the right position is to short the stock. If you think this is underestimating the potential and/or TSLA's chances of making it, then the right position is long.
     
  15. deonb

    deonb Active Member

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    Good way of calculating. Here are the numbers expanded a bit for the potential of hitting $75, $150, $300 and $500 from the current price (given the 10% per year discount rate), vs. your confidence level of it hitting that price within 5 years.

    Red means overvalued.
    Expanded.png

    To put that in perspective, at a 25% gross margin, here are the number of cars Tesla needs to sell/make to hit each price, given a range of P/E values:

    PE Ratio.png
    So let's say you believe TSLA 5 years from now would turn into a moderate growth company with a P/E ratio of 20, and that they can only sell 45'000 cars per year. Then Tesla is valued at $75 in 5 years, meaning you're overpaying today at anything more than $45.

    If you think there is a 50/50 chance that they would still be high growth (i.e. a P/E of 40), and sell 90'000 cars per year 5 years from now, then Tesla is valued at $300 in 5 years, and at the 50% odds it means they're valued at just under $100 today.

    Use at your own risk :).
     
  16. DonPedro

    DonPedro Member

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    kudos for those analyses!
     
  17. derekt75

    derekt75 Member

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    Gross margin is not the same as earnings, as it doesn't include operating expense, which was $424M for Tesla in 2012. I believe Tesla said they expected to reduce their operating expenses in 2013, but you can't just take the $400M of annual margin and convert that to $400M of annual earnings; you need to subtract out the $400M or so of operating expenses.
    In 5 years, I expect Tesla will still have low earnings as they continue to dump money into growing (including R&D).

    Maybe 90k cars with an average price of $50k, 20% gross margin, 15% operating expense = $2 EPS. Using your discount rate of 10%/yr and your P/E of 40, that puts today's value around $53/share. So today's value might make sense if you assume that the above is an average result for the company. Personally, I'd expect either less than 5% operating income for Tesla in 2018 or less than 40:1 P/E ratio in 2018, but that's open for debate.

    Because valuations based on earnings * P/E are so sensitive to operating expense decisions, I was preferring to look at the company more in terms of how it compares to another car company. 90,000 cars in 2018 would mean that it's selling at about 6% of what Audi sells at. If their growth potential from there were equivalent, you'd expect TSLA to be worth 6% of Audi in 2018 ($25), minus the discount for 5 years: $20. So, if an average result is 90,000 cars in 2018 with limited growth beyond that, then today's price should be around $20. The fact that it's over $50 today means that 90k cars in 2018 with limited growth potential would be a really lousy result. That's why I said that Gen 3 success is already baked in to the price. For $50 to make sense, you need to expect an average result to be not just 90k cars in 2018, but also something like 500k cars in 2023. If you pay $50 for the stock today, you're saying that if Tesla only sells 250k cars in 2023, it will be a disappointment.

    I wouldn't mind a comparison to some other upstart manufacturer. Are there any examples of companies coming out with revolutionary technologies that need to manufacture and sell > $1000 hardware? The closest comparison I can think of is BBRY. In 2002, it had a market cap of $1B on $300M in sales. It was well undervalued. A few years later it was a market cap of $40B on $1B in sales, and was (to my mind) overvalued. TSLA has a market cap of $6B on $1.5B in sales, so by that comparison, yeah, maybe TSLA is still a good buy.
     
  18. deonb

    deonb Active Member

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    I didn't take gross margins as earnings. I used Sal Demir's calculations, which gives a 10.7% net margin on the 25% gross.
    http://seekingalpha.com/article/1381001-tesla-motors-full-analysis-its-only-mistake-outlook-and-elon-musk?source=msn

    The P/E table above however is linearly scaled for simplicity though, so it does things like keep a 10.7% net margin constant, as well as a car price constant. Both being an oversimplification.

    Sal's table (and many others) would provide a better way to estimate - plug in whichever numbers you prefer for the bottom part to figure out the 5-year stock target. (They're going to be guesses no matter what).

    My point was more that once you reach a 5-year stock target price and confidence, how does it work back to a current value. (i.e. Don Pedro's original point).

    PS: Don, can't help but pointing out that your name is quite a tasty (and very common) drink where Elon Musk (and I) come from :) :

    dom-pedro-410x546.jpg

    http://tastykitchen.com/recipes/drinks/south-african-don-dom-pedro/


    I personally prefer using single malt scotch (preferably 12 year Glenfiddich) over Kahlua though, but both would be considered a Don Pedro. (Restaurants will ask which).
     
  19. derekt75

    derekt75 Member

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    ah, okay, thanks.
    Well, I disagree with Sal's numbers, but at least folks are talking in numbers now, so that makes me happy. :)

    2013 seems the easiest to critique.
    $490k in gross profit seems a touch high to me, but in the right ballpark.
    Cutting operating expenses from $420k to $280k seems rather severe.

    If I were running Tesla and I had a gross profit of $490k, I'd be putting most of that profit into R&D on future cars rather than early repayments of loans. Cutting to $280k would mean cutting R&D in about half, and why would you do that when you've got Model X and Gen III to design (not to mention Model S features like adaptive cruise control to figure out).
    and if you do cut R&D that severely, I can't see how you get the growth Sal predicts.

    oh well, I wish I could bet on Sal's numbers or JP's numbers being wrong rather than only being allowed to bet on the actual market. :)
     
  20. DonPedro

    DonPedro Member

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    Haha! Went there once but never had one of those.
     

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