Here’s a quick question for stock market followers: What stock is up 70% year-to-date, trades at a rich valuation despite recording huge net losses, burns a ton of cash and is one of the most heavily shorted stocks on the U.S. markets right now? If you guessed Tesla Inc (NASDAQ:TSLA), you’d be right.
The short case for TSLA stock sounds even better when you consider that its own CEO regularly lets Wall Street know he thinks his own shares are overpriced.
But the shorts keep losing.
Shares are up roughly 65% year-to-date, and its 1,000% gains over the past five years have opened up short-term bearish opportunities, but that’s a lot more winning than losing, especially compared to the S&P 500, which is up about 75% in that time frame.
I get it. Tesla’s valuation is through the roof, and the debt just keeps piling up — including a $1.8 billion debt offering just about a week ago. I get the temptation to bet against TSLA stock with both fists.
But give it up, shorts. You’re only hurting yourself.
Model 3 Production Ramp
Much of Tesla’s advances over the past year or so have been rightly attributed to the Model 3 — Tesla’s “affordable” mass-market vehicle that’s supposed to spark mainstream interest in what has so far been an exclusive, high-end brand.
We’ve moved on from the hype cycle, and into the execution stage. And that has the bears licking their lips.
For the next couple of years, it’s “reality check” time. Tesla can no longer hide behind what might be, and instead must execute. And CEO Elon Musk even gave investors a taste of what’s to come, saying the company is entering “production hell.”
But this production run should be a bit less painful than the other two – and could reap bigger rewards.
Remember: Tesla ran into production snags with the Roadster, Model S and Model X. Along the way, they’ve learned a few lessons, such as the dangers of having “too many bells and whistles.” The Model 3, as a result, is simple. Musk says there’s nothing in the car that “doesn’t need to be there.” That simplicity could reduce the number of problems, which in turn would impress what should be an understandably skeptical Street.
Maybe that’s why management sounded so confident about Model 3 production in its Q2 2017 update letter. The company is confident it can produce more than 1,500 vehicles in the third quarter, and hit a production run-rate of 5,000 vehicles per week by the end of 2017. Management expects to scale that production run-rate to 10,000 vehicles per week in 2018.
Right now, Model 3 orders are rolling in at just under 13,000 per week. That implies supply will get close to equaling demand in 2018.
That’s a good place to be for Tesla, considering one of its biggest downfalls thus far is its inability to produce at scale to meet demand.
Bottom Line on TSLA Stock
That’s the crux of why while I do believe Tesla is overpriced by just about any traditional metric you can assign — and there aren’t many, as the company isn’t even profitable — I can’t bring myself to bet against TSLA. Even amid issues such as disappointing second-quarter deliveries, shares have remained resilient.
And if Tesla surprises to the upside and actually produces to expectations, shares could really take off, scaring the shorts out of their positions and generating yet another virtuous short squeeze cycle.
Another potential driver (and admitted potential headwind) are upcoming quarterly reports as we get a better idea of what kind of margins Tesla is generating from the Model 3. Cost of production expectations have run the gamut, but then, so have average buying price expectations — while the base is $35,000, Musk and analysts alike believe the actual average once options go up will be significantly higher.
The long-term implications of simply getting more Teslas on the road — an advertisement unto itself — are bullish, too. Exposure should pique the interest of consumers who previously haven’t given Tesla a serious thought.
There are no guarantees here. Significant production snags could threaten to make winners out of the bears, as could cancellations of Model 3 preorders. But the probability of success still appears high enough that I can’t bring myself to short TSLA stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
