Over the years, investors have lost a fortune shorting Tesla Inc (NASDAQ:TSLA). And the interesting thing is that the bearish bets have not let up. Consider that about 27% of the float of TSLA stock is shorted! This represents a whopping $16 billion of the market cap.
It’s true there are convincing arguments for this trade. But when it comes to short selling, there are some stocks that defy fundamental principles. This is often the case with groundbreaking companies, which can sustain inflated valuations for a prolonged period of time.
Now this is not to say that TSLA stock is immune to a punishing drop. Let’s face it, all great companies eventually stall out. And Tesla will be no different. But it probably won’t be any time soon.
First of all, Tesla is in the midst of a major change in its business, as it is gunning for the mainstream market. Granted, there are plenty of things that could go wrong. Efficiently producing 10,000 cars a week will be no easy feat (this is the goal for next year), especially since the Model 3 is highly complex.
But then again, Tesla has many advantages. CEO Elon Musk has been smart to put in place an infrastructure that should allow for a smooth transition. This has involved setting up a network of charging station as well as creating low-cost batteries.
Something else: Tesla has been masterful with its marketing. In a sense, the company’s standout innovation has resulted in getting the attention of customers. Note that there are over 500,000 pre-orders for the Model 3.
The Issues for Tesla Stock
Of course, there are still some recent developments that should cause concern for holders of TSLA stock. One is the complaint from the National Labor Relations Board regarding allegations of safety issues and adverse working conditions.
Although, even if true, these incidents are likely not to be material for a company of TSLA’s scale. Besides, when it comes to the manufacturing industry, there is inevitably some dissension within the ranks as well as moves to unionize.
OK then, but what about the problems with the Autopilot system? Might this be a fundamental issue? Perhaps so. This was highlighted in an in-depth a article in the Wall Street Journal. Based on the reporting, at least four high-level managers and six engineers have departed. The buzz is that the concern is that TSLA is not being mindful of safety.
While this does seem ominous, the fact is it can be tough to determine the true reasons why employees leave. After all, TSLA does require the signing of airtight nondisclosure agreements. What’s more, the market for tech talent is intense right now, especially in the self-driving sector. Consider that TSLA has hired over 35 people for its Autopilot department this year.
Bottom Line On Tesla Stock
When it comes to TSLA stock, there are certainly longer-term risks. Keep in mind that the competition will ultimately weigh on the company. Companies like General Motors Co. (NYSE:GM), Ford Motor Co. (NYSE:F), Mercedes-Benz, Toyota Motor Corp. (ADR)(NYSE:TM) and BMW have been aggressively ramping their efforts with electronic vehicles. These operators have also learned important lessons from TSLA about design, engineering and advanced manufacturing.
At the same time, TSLA will need to deal with tech giants like Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG), Uber and even Apple Inc. (NASDAQ:AAPL). These companies have enormous resources to make a big play for the opportunity.
However, it will probably be a few years until the competition hits critical mass, as Tesla has a lead in the market. According to Robert W. Baird analyst Ben Kallo, the battery cost of the Model 3 is only about $8,400 compared to an industry average of $14,200. It certainly helps that TSLA has its own battery manufacturing, which is done through the gigafactory.
So given the advantages, TSLA stock should still have more room on the upside — and will likely continue to make life miserable for short sellers.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
