Tesla Motors (TSLA): Shorts Have Been Bloodied, But They’ll Be Back

Electric vehicle manufacturer Tesla’s (TSLA) stock rocketed up last week after the company reported positive earnings and operating cash flow for the first quarter.  The stock had been heavily shorted, and short covering evidently fueled the stock’s take off.

Color me skeptical.  The company was heavily shorted for good reason, and is even more ripe for shorting after the run-up. (Personal opinion.  Not investment advice.  You’re on your own about that.)

For one thing, although operating results did improve from the (really terrible 3/4Q12), the much hyped earnings number was put into positive territory by two items: a write down of a warrant that Tesla granted the Department of Energy as part of a $465 million DOE loan to the company, and FX gains (mainly on yen).  Not repeatable.  And the first seems highly dodgy to me-a squishy number based on an assumption that Tesla will be able to pay off the loan.

I’m also skeptical because of the near miraculous nature of the turnaround. Mere months ago, the company was in dire straits:

It’s a lucky thing for Tesla Motors shareholders that the U.S. Department of Energy loves the company’s loan applications.

Without the hundreds of millions of dollars Tesla (US:TSLA) has received from the federal government this year, the electric-car maker’s financials would be gasping for air as 2012 winds down.

Given the ugly state of Tesla’s finances — and the company’s sky-high valuation: almost $4 billion — it will rank among the top candidates in Silicon Valley for a 2013 stock collapse, unless it receives significantly more cash next year.

I get a whiff of a company that needed a miracle to stave off disaster.  Maybe it got one, but I am always skeptical of miracles whenever accounting is involved.  And that’s certainly the case here.

The shorts have been bloodied, but they’ll be back.  Indeed, this seems like a typical battle in a war between a dodgy company and short sellers.

But I am most skeptical because of Tesla’s not-really-founder-but-biggest-investor, Elon Musk.

Mr. Musk is Occupy’s favorite crony capitalist.  And Occupy is one of Mr. Musk’s favorite movements.

Yes, once upon a time Musk started a real business, Paypal, that proved very successful without any government help.  That was then, this is now.

Musk has three ventures: Tesla, SpaceX, and SolarCity.  All are heavily dependent on government largesse.

Take Tesla for starters. It received the $465 mm loan from DOE, but it also benefits from a $7500/car federal subsidy for electric cars.  Moreover, it benefits from the State of California’s Zero Emissions Credit program.  In its infinite wisdom, CA mandated that all the major auto companies sell a certain number of zero emissions vehicles.  If they don’t they have to buy credits from companies that do make them-namely, Tesla.  This was also essential in putting the  company in the black in Q1, and the company is sitting on $250 mm worth of these credits.

IOW, Tesla’s profits are courtesy of you, the taxpayer-and also courtesy of the shareholders of Ford (F), GM, Toyota (TM), Honda (HMC), etc.

Next consider SpaceX.  This venture provides evidence of Musk’s love for Occupy: he has promised that this private space venture will go to Mars, and wears an Occupy Mars shirt to make the point.

It is also touted as a privately capitalized space venture, which it is, I guess, but it is also almost completely dependent on government contracts.  The private money is attracted by the scent of public money. Sorry, but a company that is dependent on NASA’s IV for support is not truly a private company: the company is basically a cutout between the investors and the taxpayers.

The company has not exactly covered itself in glory.  It had serious trouble with its initial launches, including an embarrassing episode in which the ashes of Star Trek’s Scotty, James Doohan, were on a SpaceX craft that didn’t make it into space: it crashed instead somewhere in the South Pacific.  Which I guess would have been great if James Doohan had starred in South Pacific.  Don’t worry, though.  As a precaution, some of Mr. Doohan’s ashes were retained, and that part of the beloved actor’s remains did make it into space as he desired.

And speaking of Broadway and movie classics, Musk is auditioning for a role in a summer stock Music Man with his boosterism of SpaceX:

You don’t have to be a believer in conspiracy theories to wonder why senior government officials are so committed to going the commercial route in space. Even a cursory review of SpaceX programs and plans reveals reasons for doubt. The questions begin with a business strategy that isn’t just disruptive, but downright incredible. Mr. Musk says that he can offer launch prices far below those quoted by any traditional provider — including the Chinese — by running a lean, vertically integrated enterprise with minimal government oversight that achieves sizable economies of scale. The economies of scale are possible, he contends, because there is huge pent-up demand for space travel in the marketplace that cannot be met within the prevailing pricing structure. By dropping prices substantially, this latent demand can then be unlocked, greatly increasing the rate of rocket production and launches. When combined with other features of the SpaceX business model, the increased pace of production and launches results in revolutionary price reductions.

There isn’t much serious research to demonstrate that the pent-up demand Musk postulates really exists, nor that the price reductions he foresees are feasible. He has suggested in some interviews that launch costs could decline to a small fraction of current levels if all the assumptions in his business plan come true, and he has posted a commentary on his web-site explaining how SpaceX is already able to offer the lowest prices in the business. It’s hard to look inside the operations of a private company, but SpaceX does seem to be doing all the things necessary to minimize costs such as using proven technology, building as many items as possible in-house, and hiring a young workforce willing to work long hours. And to his credit, Musk has committed over $100 million of his own money to the venture. However, his rockets have major performance limitations compared with other launch vehicles in the market, and they are not yet rated as safe for carrying people. Becoming “man-rated” will necessarily increase the role of federal officials in monitoring SpaceX operations, which is not good news for a business model grounded in minimal government oversight (traditional launch providers say government regulations and overhead charges are a key driver in their own pricing policies).

Downright incredible sounds about right.  It sounds like a con to me.  Especially the whole “economy of scale” thing.  That’s the kind of thing defense contractors say to get the government to buy more units of a plane or ship.  It’s not good economics.

And Musk’s winning personality was on display when questioned about SpaceX’s launch failures:

Mr. Musk recently responded to a question from Space News reporter Amy Svitak about the two-year delay in accomplishing that second Falcon 9 launch by observing, “In the space business that’s on time.” Perhaps he was irritated by the reporter’s implied criticism, but it goes without saying that if astronauts on board the space station are awaiting supplies, a prolonged launch delay could spell big trouble.

What a guy.  Takes your money, and then gets peevish when you accuse him he’s blowing it.

Then there is SolarCity, an installer of solar panels.  The solar industry has raked in $4.1 billion of stimulus money, and the government thinks that SolarCity in particular has played fast and loose with the numbers to  get more than it should:

Last July, federal investigators subpoenaed SolarCity Corp., SCTY +9.10% the largest installer of residential solar panels, as part of a probe into whether solar-power companies received excessive government grants.

. . . .

Even before the Treasury Department’s inquiry into grant applications filed by SolarCity and other installers, House Republicans had questioned the program’s effectiveness in creating jobs. Congress declined to renew the grant program at the end of 2011, and only projects that were being planned by that date can receive grants today.

The government is looking into whether SolarCity and other firms misrepresented the fair-market value of solar systems in order to boost the value of the grants they received. In its suit, SolarCity says two of the company’s subsidiaries received smaller-than-expected grants. The company doesn’t say exactly how much funding it applied for originally, but it says the final grants issued by the Treasury Department were $8 million less than was proper under the law.

But SolarCity (SCTY) is doubling down on the chutzpah, and suing the government, claiming the government has paid it too little!:

Now, SolarCity is pushing back with a lawsuit that alleges the opposite: some of the taxpayer-funded grants it received weren’t as big as originally promised.

The suit, filed quietly in February in the U.S. Court of Federal Claims, comes as SolarCity and other industry players are defending solar-friendly government policies, and it could undermine the industry’s message that solar power will soon be viable without government help.

Solar businesses have cratered around the world: China, Spain, Germany.  The industry is addicted to government support.

Elon Musk has a plan to get rich.  It involves you.  The taxpayer.  You pay taxes.  The government gives huge dollops of that money to Elon.  Elon gets rich.  Who could possibly object? Who could deny Elon’s genius?

He certainly thinks he’s a genius.  He has no hesitations in telling people so.

And there is a kind of perverse genius here.  In the Age of Obama he has found the key to riches.  Get in good with the government-by, you know, sponsoring an inaugural ball.  And then let the government give you the goodies.  Then sue the government if they don’t give you enough goodies.

And then preen before the world, touting your genius-and your environmental credentials. (Pay no attention to that private jet behind the curtain!) (Musk quit the Zuckerberg-created immigration lobbying effort FWD.us because it bought ads supporting politicians who support immigration changes but also had the temerity to support the Keystone pipeline.)

What a repulsive man.

Repulsive, yes, but sadly, Elon Musk is a Man For Our Age, in more ways than one.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

Visit: Streetwise Professor

7 Comments on Tesla Motors (TSLA): Shorts Have Been Bloodied, But They’ll Be Back

  1. Craig, you just don’t want to give Elon Musk any credit. There are lots of industries who benefit from the government – defense, oil, road construction, building construction, nuclear power, and how many times have we bailed out banks in the last 45 years?

    In America, the Model S is outselling the BMW 7-Series, Mercedes, and Audi in the large luxury class. Maybe you should find out why? They are currently working on the Model X, an SUV. With people paying $50K – $60K for SUVs that get 9 mpg city / 12 mpg highway, if he can get the Model X close to that price he will break into that market too.

    SolarCity has an incredible business model by allowing customers to have solar power with no upfront cost for a 20-year contract in which the customer agrees on a guaranteed price for power. It pays back in 5 or 6 years, but the money keeps coming in after that.

    You are right that the shorts will be back for TSLA. The people who are betting against America are like drug addicts, they won’t change. Right now the numbers don’t justify TSLA’s price, but the growth story might. Apple was worth $7 per share in the last decade. I saw this short squeeze on TSLA coming. I predict there will be another short squeeze on BlackBerry (BBRY).

    I have shares of BBRY, SCTY and TSLA.

  2. Halliburton gives Cheney 30 million for retiring early so he can be president…I mean, vice president. He takes the country to war at a cost that will reach 5 trillion over time due to interest and health care for wounded soldiers. All to obtain contracts for private corporations in Iraq. Halliburton then moves its offices to Dubai so they don’t have to pay taxes. Exxon makes billions of dollars a quarter, but still gets tax breaks from the American taxpayer.

    Pardon me if I don’t shed a tear for the government to give some money to companies like Tesla and Mr. Musk who are trying to build a world where we put a solar panel on our roof and eliminate the oil companies from the equation when that energy powers his electric cars.

    The Iraq war alone cost the taxpayer $10,000 each. We could have installed solar panels on every house in America for the same cost.

  3. I do not understand the hang-up on getting government loans and have government contracts and basing sales pitch on tax credits to buyers? They are playing by the rules. They are not breaking any laws. Why the underlying tone of “wtf”?

    Many industries benefit from government subsidies and programs (As mentioned above, sugar, corn and other commodities come to mind, not to mention the zero Fed Funds rate that recapitalizes banks at zero risk). Many companies sell exclusively to the government and dependent on such contracts for survival. This does not make them better or worse capitalists.

    Why isn’t the story of good old fashion American innovation and intelligence to bring about perhaps the first real new car line in 60 years, not to mention a leap of technical innovation….So what how they got there (as long as legal).

    BTW, I would short TSLA…it is wildly overbought…but this is a different story then the economics, products and management.

  4. Tesla Model S – the best performing, most innovative sedan ever created. Pre-cursor to the mass market electric car. 3000+ employees.


    Threat to oils, existing car manufacturers, car dealers.

    Space X – the first private company to resupply the international space station (currently the only other resupplier is Russian government). The first transparent transportation pricing published on their website. The largest rocket engine manufacturer in the world. 3000+ employees.

    Threat to a lot of big, comfortable “Cost Plus” contract organisations that was really reaping NASA (taxpayer in this author’s words) money. http://en.m.wikipedia.org/wiki/Cost-plus_contract

    SolarCity – is the largest solar power provider in the US who is installing solar panels completely for free and charging customers less than their current utility providers (requires 25 year contract).
    1600+ employees.


    Threat to big utilities…

    Btw: Paypal is software, the new business are Hardware (and software). It cost a tiny bit more to start such operations. If you don’t appreciate such Herculean tasks, at least your government does.

    Skeptical is not the right word to call yourself if you doubt Musk. Joker is.

    Dummy lesson in loans, grants, subsidies etc: loans are loans – anyone can ask for them, but you’ll have to convice the lender that you are sound with your plans to get one. And it’s the lender that makes the decision not anyone else eg taxpayer)

    Repulsive is to read such articles – this is not written as one opinion. Such article is written with a paid agenda. A lot of Joker’s feeling extreme heat.

  5. Interesting. A lot of Musk sock puppets trolling the blogs promoting corporate welfare and a failed business model. Good news- Short sellers pushing the price even higher today. It’s going to be an exciting drop and couldn’t happen to a nicer (bigger jerk) than Elon Musk.

  6. Robert: the only failed-models and small jerks are Jokers like you. Sorry.

    Let me ‘re-troll’ my comment from another website, I consider it insightful, and nonsense like this article needs to be rebuffed especially when this bs appears on Yahoo Finance
    (a lot of people read comments more than the article – I know I do, because a lot of commenters are genuine and passionate. The writers are paid to write and doing their job to ring controversy to leach clicks off popular topics – eg it’s a strategy Forbes uses)

    Everyone is free to use Elon’s methods – loans etc, – copy them if you can’t come up with things like that – create businesses, value. Why moan about it? Jealous – because in reality it is generally unachievable? Especially for those of you who can only point fingers, cry, complain and try to belittle anyone more successful than yourself. Jokers

    Remember one point if you will: check in 5 years: Most of the cars will start being like Model S. The iPhone was the first of the kind, look at the phone market now. It’s a new chapter in autos. The big auto CEOs have big eyes now (like yourself) – they have to adapt, quick or else…

    Btw, How do you like them apples today? – with a secondary offering and a “shut up Jokers” early payback of the DOE loan? Surely there’s another conspiracy to moan about. – please write more garbage… For your own and your customer’s fun to look back in a few years and show them how insightful you were… Good luck!

    For now watch this (warning: shorters may get repulsed more, after all their lost they hose already):


  7. Never was there a more short sighted group than traders. If my stock moves a penny at the expense of the taxpayers, well then thats just smart (genius!) business, amirite? I mean, as the last commenter said, everyone – EVERYONE – can just go get a few billions in loans from the feds! Its all free and great for business. Stop complaining, citizen, my portfolio is up a fraction of a point!

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