What an exciting time to be long or short Tesla

Michael Frazis

Frazis Capital


This kind of move is invariably a short squeeze, as each move higher triggers incremental buying demand. It goes until it stops. 

The strongest part of the short thesis was that the Model 3 would flop. Well... it hasn't. Model 3 production is up over 40% year-on-year.

Short interest has come down considerably, but there are still 24 million shares on loan. 

At least $16 billion has been lost on these very shares since the lows last year. 

These losses are sitting on the PnLs of various hedge funds around the world. Given that much of the move happened since December 31, these results have not been released. 

This is many multiples of the $6 billion or so that Musk has spent building a world-changing business. 

The true losses of this multi-year short position are far higher. You would have to include the borrow cost, and the enormous amounts of put premia that have been spent by the bears monthly. Each of these may also run into the billions.

Tesla share price (blue, LHS) vs shares short (black, RHS)

What a waste of capital.

One of the reasons we don't short any more is that there's something about it that deeply affects your psychology, in a very unpleasant way. "The world is wrong, it just can't see what I can see!" 

The twitter hashtag #teslaq (q is added to bankrupt companies) is case in point.  Amidst all the bullying, spying and taunting, many of those who thought they were the next Jim Chanos have put their followers, investors, and likely personal balance sheets into quite a tight spot. 

I'd guess that those that can survive the next few weeks will be able to buy back their short at much lower prices than $800. Then again, the price may never go lower.

Which brings us to another reason not to short: sooner or later you're going to get caught in something like this. We've certainly had far more luck buying heavily shorted stocks, like Carvana, Alteryx and Afterpay. 

Noone's perfect

Musk is very publicly all too human.

The Model S was described by some as the best car ever made. The logical next step was to build a slightly cheaper riff on the same theme - ie the Model 3. Instead Musk went down the rabbit hole of producing a very odd looking SUV with gull wings. This was confusing and a multi-year setback. 

The decision only makes sense once you realise Elon had young kids at the time, and needed an SUV. 

Loading up Tesla with debt after the purchase of SolarCity was also a risky move. 

Perhaps he did need to keep his reputation intact and make the acquisition. But he could also have sold $7b of stock, diluted maybe 15%, and launched the Model 3 on a bulletproof net-cash balance sheet. 

But with the share price rocketing, even this 'mistake' seems to have paid off handsomely.

Tesla balance sheet evolution

High growth companies that are losing money can pay employees with stock, and actually accumulate cash. Generally, straying from this recipe leads to disaster. As of today, this is a clear exception.

Live and Learn

We owned Tesla from ~$80 but sold years ago. Maybe we were a little too self-congratulatory.

As per usual, with a fast-growing, innovative company, selling unique and widely loved products, we should have just sat on our hands. 

The lengthy short theses flying around the internet all talk about competition. But who is going to pay up for a Tesla copycat from Toyota? As with therest of the industry, everyone else is going to fight it out for zero net margin, while the companies with genuine customer love will charge a premium, and the only industry profits. (True customer love is very different to being a well known brand) 

The smartphone industry is perhaps a good guide to what happens next. The one luxury producer took almost all the industry profits. At times, when the rest of the industry was running at a loss, Apple took even more. Often Apple was selling every product it could make, which is the situation Tesla was in with the Model S years ago. 

I can't see anyone camping outside a store to buy a Honda plugin. 

The hard part in business is finding customers to buy your products, and Tesla has always had this in spades. This is one of the few companies in the world that can get deposits on hundreds of thousands of preorders for new products.  

So we have had our own lesson to learn... and learned it well. 


1 topic

Michael Frazis
Founder and Portfolio Manager
Frazis Capital

Michael manages a global equity investment fund focused on technology and the life sciences. Michael completed undergraduate and graduate chemistry degrees at Magdalen College, Oxford University, and studied finance at the London School of Economics

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