Greenlight Capital’s David Einhorn has been getting clobbered on his Tesla short position, just like every other hedge funder who has been somewhat sensibly betting against CEO Elon Musk’s surging stock price and $50-billion market cap.
He says there’s a Tesla bubble, and even Musk would probably admit that he’s right. In a letter to investors dated April 25, Einhorn lumped Tesla in with other go-go growth stocks and wrote, “In due time, we expect these bubbles to pop.”
Bubbles always pop, but the Tesla bubble, scary as it is, won’t pop anytime soon.
If Tesla reverts to its historic trading pattern, the stock will decline precipitously at some point in the next 12 months. Having topped its previous highs in the $290 range and busted through $300 — surpassing Ford by market cap to become the number-two US automaker behind GM — Tesla should swoon in the low $200s, giving short-sellers with strong stomachs some satisfaction.
Einhorn should provide his investors with some sort of meaningful timeline here. That’s because as long as US auto sales are running at an elevated level — they’ve been holding at 17-million and above for the past two and half years and show no signs of significantly slackening in 2017 — Tesla will have support for its valuation.
Electric cars aren’t selling well at all, making up only about 1% of the global market. But Tesla has seen its deliveries steadily increase, nearing 100,000 in 2016, with 500,000 on the agenda if the company can launch its $35,000 Model 3 sedan on schedule later this year. This means that there’s at least a Tesla market, if not a market for EVs overall.
Tesla vs. a sales downturn
Unfortunately, Tesla probably won’t be able to increase demand at its expected clip if the US sales market goes into a cyclical decline in 2018 or 2019. A sales pace of 15 million to 16 million annually would be a serious headwind for Tesla, as it would be for anyone not selling the bread-and-butter vehicles of American life: SUVs and pickup trucks.
However, the current sales pace is likely to hold up for another 12 to 18 months, driven by cheap gas, cheap credit, and an economy at or close to full employment. That alone will bolster the Tesla bubble, at least for awhile.
If you look at the history of US auto sales, you’ll notice Tesla’s share price took off around 2013 and has been swelling right along with an expanding US auto market.
Even the loss of a few million in sales might not diminish enthusiasm for Tesla’s stock. The narrative around the company is that it isn’t governed by the same familiar rules as the rest of the auto industry. A standard-issue downturn could diminish Tesla sales, but that would only worsen the losses that investors have come to expect, as they wait for Tesla to become a million-vehicle-a-year powerhouse that vindicates its lofty market cap.
Einhorn’s short bet on Tesla seems to based on the assumption that Tesla is actually a tech stock, and that there’s a general bubble in tech investments. But over the past few years, we’ve seen that Tesla is mostly not a tech company. The company’s biggest challenge has been with developing the car-making competence that’s widely shared by the very auto giants who’s market caps it has trounced. Tesla built fewer cars in all of 2016 than Ford builds of just one model in a month.
Einhorn should know this because he’s been a longtime investor in GM and is currently agitating to get his own directors on the GM board. He’s also pushing GM to create two new categories of stock: one for dividend-friendly investors; and one focused on growth. It could be that, like many well-capitalized short sellers, he can stay short until he’s right. Eventually, he could be.
But his investors are going to have to hang in there for a while. Tesla is up over 1,200% since its 2010 IPO. There have been some big drops during that period. But overall auto market dynamics don’t appear to support another major plunge before the end of 2017. If the Model 3 launches on time, the stock could go ballistic, busting through $400 a share.
Against that, Einhorn’s wait-for-the-inevitable strategy seems seriously risky.