The decision by Tencent Holdings Ltd (OTCMKTS:TCEHY) to buy 5% of Tesla Inc (NASDAQ:TSLA) for $1.7 billion seems to have caught out the company’s short sellers.
TSLA stock is up more than 30% so far in 2017, despite the company’s posting a loss for the December quarter on sales that fell short of the mark set in September of $2.3 billion. The balance sheet shows debt skyrocketing, cash flow is coming entirely from financing, so the most logical thing for a trader to do seemed to be to short the stock.
Short interest peaked in December, but it has remained high. About 19% of the common was short on March 15. The Tencent investment was announced on March 28.
Goldman Sachs Group Inc (NYSE:GS) underwrote the Tencent investment, even though their analyst had a sell on Tesla stock with a price target below $200 per share.
TSLA opened the last day of the quarter at around $278.
Musk Still Has Enemies
At its present price, Tesla has a market cap nearly equal to that of Ford Motor Company (NYSE:F), which sold 176,712 cars in January. Tesla, meanwhile, delivered 76,230 vehicles during all of 2016. Tesla’s goal for 2017 is to produce 500,000 vehicles at its Fremont, California, production plant, which would make that factory the most productive in the world.
Bob Lutz, who at 85 has held top jobs at all of America’s “big three” automakers, is among those who is not amused.
“They lose money on every car, they have a constant cash drain, and yet everyone talks as if this is the most miraculous automobile company of all time,” he told The Los Angeles Times recently.
Yet Musk is still able to get smart companies like Tencent to advance cash, based on promises, like solar roofs that cost no more than regular roofs — promises he has yet to fulfill.
Tesla’s Problem Is Scale
Like others here at InvestorPlace, I cover Tesla regularly. I find the fundamentals to be completely out of whack with the valuation. And I recommended selling the stock in January when it was trading at $254, noting it was at the top of its trading range.
Within a month, TSLA stock was at $280 per share and is now trading within a few dollars of that figure. So what do I know, right?
James Brumley may be correct — that the Tencent underwriting is a huge buy signal. Even before ink was dry on that deal, Musk himself was off founding yet-another new company, Neuralink, which will work on man-computer interfaces.
More big dreams.
While most other technology executives were nonplussed by Donald Trump, Musk rushed to his side, causing one news site to label him a “crony capitalist.” He has even deleted tweets critical of the administration.
But one thing he has not been able to do, in all his rushing around among Tesla, Neuralink, SpaceX and SolarCity (which Tesla bought last year) is scale. Musk dreams big, Musk plans big … but Musk delivers small. When someone points out the distance between his promises and delivery, he simply dreams another dream, or spins his reality distortion field around another investor, relentlessly charming a disbelieving world.
All the while, TSLA stock soars.
Bottom Line on TSLA Stock
This is what capitalism is supposed to be about: big egos with big dreams creating big change. But at some point, that change must happen at scale. At some point, promises must be fulfilled or the dreamer gets written off as a con artist.
Maybe in the age of Trump, those rules no longer apply. Maybe in the age of Musk, there is no longer such a thing as financial gravity. But that still is not the way to bet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
