5 Reasons To Short Tesla Now

David Goodboy's picture

Tuesday, May 8, 2018 - 2:30pm

by David Goodboy

I struggled to write this article since I love Tesla's cars and genuinely want to believe in Elon's vision.  

I am an automobile fanatic, having owned multiple sports cars and other vehicles, so I am speaking from experience when I say I was blown away by the performance, handling, and ergonomics of the Model S. The jump from 0-100 MPH was breathtaking at under 5 seconds thanks to the silent explosive electric power.  

Investors have been crazy over the stock for the last five years.  I can't say I blame them, with shares returning over 400% compared to the S&P 500's return of 66% during the same time frame.

But no matter how much I want to embrace the stock, it no longer makes sense. Remaining objective is a crucial trait for successful investors, and after researching Tesla, the shares remain extremely overvalued. The stock is trading lower by around 8% this year, and I expect further downside over the next 18 months. Here are five reasons to short Tesla now:

1. The Fundamental Metrics
Stocks are anticipatory mechanisms, meaning they are priced based on expected performance. In Tesla's case, the current standard fundamental metrics are so out of whack with the share price that I cannot fathom them ever lending support to the overextended share price.  

EPS is at nearly negative $10, P/E posts over negative 32, ROE reads negative 16.4%,  and the stock carries a 240%-plus debt to equity ratio. There is no way these figures justify the $301 share price.

In fact, for a nearly $50 billion company with over $12 billion of revenue, it is a travesty that the shares are still so high.

2. Debt
Tesla is mired in the worst kind of debt. Its corporate debt has been downgraded from B2 to B3, with unsecured debt ratings plunging from B3 to CAA one. In other words, think of TSLA's debt rating like a personal 500 FICO rating. It's not bankrupt, but its credit score is not much higher. The problem is that Tesla will have an incredibly hard time raising additional funds to operate with such a low rating.  

Furthermore, Tesla has over $1 billion of convertible bonds maturing in November 2018, and March 2019.  According to Moody's, the company will burn $2 billion in operating cash in 2018, and that is only if Tesla maintains high discretionary expenditures to ramp up capacity.

Combined with the debt maturation, Moody's estimates that Tesla will be forced to undertake a near-term capital raise of over $2 billion, not to mention the need to raise even more money to maintain its expansion rate.  

To put Tesla's cash burn rate in perspective, Bloomberg estimated the company spends an astounding $6,500 per minute, 24 hours a day, seven days a week.

Not only does the debt severely hinder Tesla's options, but it also places the company under the genuine threat of bankruptcy.

These are problems one would expect with penny stocks traded on the pink sheets, not a massive brand like Tesla.  

3. Investors Are Turning Against Tesla
In some cases, high short interest in stock can be a bullish signal. However, in TSLA's case, it is a clear signal that the company is quickly falling out of favor with investors. In fact, the short interest is just astounding!

Research firm S3 Partners has stated that Tesla has nearly $11 billion of shares on the short side.  This places Tesla in the No. 1 position of all companies with short interest.  

Representing over 30% of the float at around 38 million shares, short interest has spiked, with investors flipping sides en masse.  

High short interest can cause stocks to spike higher if good news hits the wire.  However, in this case, any short squeeze will likely be very short-lived due to the overwhelming bearish pressure from multiple fronts.

There is no question that the crowd is right this time!

4. The Man Himself: Elon Musk
Make no mistake: Elon Musk is an American hero and a business genius.  That said, he is also a dreamer with monster–sized ambitions that are sometimes out of touch with reality.  

Musk's latest tweets and the earnings conference call show a CEO that has started to become unhinged. He attacked the analysts by calling them "boneheads" and their questions "absurd." Musk furthered the bizarre exchange on Twitter where he wrote "Oh and uh short burn of the century coming soon. Flamethrowers should arrive just in time,"   referencing devices he sold earlier this year to raise money for his tunnel-digging Boring Company.

Musk's bold proclamations and business savvy have gotten him far, but it appears he has reached the apex and I expect only downhill movement from here.

5. History
Tesla is an aggressive first-mover in the nascent business of popularizing electric cars. First-movers in any sector get the early advantage, but many soon fade out due to any number of reasons. I have zero factual reasons to believe that Tesla's 15-year, zero-profit streak is going to end anytime soon. I expect to see Tesla substantially scaled back over the next few years.

Risks To Consider: Anything can and does happen in the stock market.  A positive black swan could surprise the shorts, sending the shares to new highs. Always be ready for the unexpected when investing!

Action To Take: Sell your TSLA shares if you are a longtime holder.  Sophisticated investors can look to short the shares now at $306.00 or below with a target price of $190.00 per share.  

Editor's Note: You might think Tesla would be Elon's cash cow... but it's not. You'll be surprised to find he's got his eyes on an even more lucrative endeavor. One that's potentially bigger than GM, Toyota, and even Apple... combined. Click here to grab a piece this trillion-dollar golden goose for yourself.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.