It’s Time to Short Tesla, Inc. Stock

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Tesla stock - It’s Time to Short Tesla, Inc. Stock

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Tesla, Inc. (NASDAQ:TSLA) bears have struggled with Elon Musk and his knack toward showmanship for quite some time. Musk is certainly the master of distraction, and while he and SpaceX accomplished something pretty amazing with the Falcon Heavy liftoff, that was also a distraction from the mounting problems for Tesla stock.

Eventually, I believe the Tesla con will collapse. In fact, I believe we may have seen the first major cracks in the Tesla stock foundation. Shares of Tesla sold off dramatically over the past few days due to one awful story after another coming out of the company.

One such story involved a single-car accident of a Tesla driving on autopilot. The U.S. National Transportation Safety Board (NTSB) is conducting an investigation. Considering that there appears to be a defect in Tesla’s autopilot system, Tesla car owners should be concerned. That says nothing about concerns from TSLA investors.

Let’s face it: this pedestrian fatality is exactly what every self-driving automobile bearer has been warning about. Tesla’s debt rating from B2 to B3 and its unsecured debt from B3 to CAA one, and also change the company outlook to negative.

In other words, its corporate debt is now the lowest level of “highly speculative” junk bonds there are. Its unsecured debt is not considered to have “substantial risks,” and that’s only two levels of the way from outright default.

Tesla has $1.15 billion of convertible bonds that mature, a small amount in November, and a large amount next March. but Moody’s points out just how awful the liquidity situation is.

“Tesla’s liquidity consists principally of $3.4 billion in cash and securities at December 31, 2017. The company also has moderate availability under the $1.9 billion ABL facility. This liquidity position is not adequate to cover: 1) the approximately $500 million in minimum cash that we estimate Tesla must maintain for normal operations; 2) a 2018 operating cash burn that will approximate $2 billion if Tesla maintains high discretionary capital expenditures to increase capacity; and 3) convertible debt maturities of approximately $1.2 billion through early 2019. These cash needs will likely require Tesla to undertake a near-term capital raise exceeding $2 billion. Moreover, if the company maintains its expected pace of expansion, it will likely need to raise additional capital during the second half of 2019.”

Ouch.

The credit downgrade also makes it more difficult for the company to raise additional capital.

Meanwhile, Tesla claims that it is now rolling 2,000 model 3 cars out of its factory every week. It was supposed to fit 2,500 per week this quarter, and 5,000 by the end of Q2. I don’t think there’s any way that’s going to happen.

On the face of things, then, I think now is a reasonably good time to short Tesla stock. However, there are a few caveats. First, you actually have to be able to find shares tomorrow. I was shocked to discover that Fidelity does not have any as of this morning as I write.

Next, you have to decide how much of a loss you’re willing to take. Tesla may be a good short right now but that doesn’t mean that the stock isn’t going to spike. Traditionally, I set a stop loss 7% to 10% above wherever I short a stock at. It’s up to you how much money you’re willing to lose if the stock spikes, or if you just add your short if that happens.

If you can’t find shares to short, you’re going to have to buy puts. Unfortunately, I think you’re going to have to do a long-term in the money put, which can become quite expensive.

There is one final thing to be concerned about. It’s entirely possible that a company like Alphabet Inc. (NASDAQ:GOOGL) invests several billion dollars into Tesla. Nor do I think an investment by Apple Inc. (NASDAQ:AAPL) is out of the question. Both companies have enormous amounts of money sitting on their balance sheets. An investment like that would send the stock soaring and give the company a new lease on life.

I think you have to decide whether you want to go short here, and possibly by and out of the money call to protect yourself on the upside.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/its-time-to-short-tesla-inc-stock/.

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