On Wednesday, Elon Musk set social media ablaze with his latest public event: the first demonstration of the Boring Company’s L.A. tunnel. By attaching a gadget to an existing car, you can essentially turn it into a train, and use his tunnel to avoid traffic. That’s the theory anyway. Musk calls it improved mass transit. On Twitter (NYSE:TWTR), Musk tweeted: “Subways are fine, but it’s time to upgrade to something better.”
Actually way more capacity, way faster & way more convenient. Subways are fine, but it’s time to upgrade to something better.
— Elon Musk (@elonmusk) December 19, 2018
Others disagreed vehemently.
Twitter responses ranged from calling the Boring scheme “delusional” and “a death trap” to pointing out impracticalities of the idea. Musk suggested that vehicles could pass through Boring tunnels at 150 miles an hour, but also said buses could use the system, which raises some questions. There’s also the matter of how to build exit ramps everywhere, as elevators would greatly slow the system down.
One Twitter user, who happens to be an urban transportation expert, went for the jugular, showing the mathematical issues with Musk’s “better than a subway claim.”
He wrote: “Dear @elonmusk! Metro line 3 in Budapest has a train per every 150 sec in peak hours, capacity is 28200 ppl per hour. To provide this capacity with 5-seat cars, you would need 3 Teslas in every 2 seconds (94 cars/min). How is this an innovation and not a scam?”
Dear @elonmusk! Metro line 3 in Budapest has a train per every 150 sec in peak hours, capacity is 28200 ppl per hour. To provide this capacity with 5-seat cars, you would need 3 Teslas in every 2 seconds (94 cars/min). How is this is an innovation and not a scam? https://t.co/GCF0yVBrsF
— Dávid Vitézy (@vitdavid) December 19, 2018
“Scam” is a harsh word, but Musk’s event clearly feels like a publicity stunt. He’s also been up to other erratic behavior lately, such as saying that he doesn’t respect the SEC, and naming farts after short sellers (seriously). Tesla (NASDAQ:TSLA) stock, which had been soaring, has abruptly gone into reverse since Musk’s latest round of eyebrow-raising behavior kicked off.
Why This Is Bad for Tesla Stock
Elon Musk seems incapable of focusing on things long enough to see them through to fruition. Unfortunately, since Tesla is publicly-traded, that puts its shareholders in harm’s way if one of his other ventures suffers. To say nothing of the mental stress and strain that comes from running various large companies.
This concern about having too many irons in the fire already hit once. Remember SolarCity? Tesla merged with SolarCity in what many observers viewed as a bailout of a failing company. The Economist recently followed up on SolarCity:
“After the acquisition, Mr. Musk boasted, at a Hollywood set, of solar modules made to resemble roof shingles. Yet production of these has been limited and installation of existing panels has plunged.”
Furthermore, it notes that Tesla has largely stopped even trying to sell SolarCity products through a door-to-door sales method. Within a couple years of the SolarCity merger, the much-hyped solar roof is forgotten about, and SolarCity’s old business model has essentially ended.
That leaves the question: What happens to TSLA stock when Space-X or Boring needs more money? Since Tesla has by far the easiest access to capital markets, it could end up footing the bill. If a tiny 6,000 foot tunnel cost Boring $10 million (and perhaps much more counting labor and land purchases), how much capital will it need if it is ever to try to get to commercial scale?
Short Sellers Are Actually Helping TSLA … for Now
Considering Elon Musk’s fixation with short sellers, there’s an ironic twist to this story. It’s hard to prove, but let’s consider this theory: Tesla’s stock has performed far better than other tech stocks and even better than the market as a whole this quarter, because short sellers are having to cover their bets.
There is currently around $8.5 billion in direct short interest in TSLA stock. Bears have short positions on more than 21% of the float at this time. This is an insane level of conviction on the bears’ part. And that’s arguably just the tip of the iceberg. Short sellers have also bought puts that control short positions in excess of Tesla’s entire number of shares outstanding. Put simply, there are tens of billions of dollars betting against Tesla.
A large chunk of this is surely hedge funds. This is where things get interesting. Hedge funds are having an awful 2018. In general, their short positions have gone up, while their long holdings are plunging. It’s likely that many hedge funds are buying stocks and using a bet against Tesla as their hedge.
Car companies look really cheap here, so the logical play is to buy something like General Motors (NYSE:GM) and sell Tesla short against it. Similarly, you could buy a cheap tech company like Apple (NASDAQ:AAPL) and bet against an expensive one like Tesla to counterbalance your position.
Normally, hedge funds make good money with these sorts of paired strategies. But it’s not working at all in 2018. Hedge fund outflows hit their highest level in more than five years in September. Remember, that was before the market started plunging, we can only imagine how much money is fleeing from funds now. As a result, hedge funds, which are up to their noses in bets against Tesla, are having to take their chips off the table to mail them back to their investors. This dynamic likely forced the big short squeeze in TSLA stock until this past week, when Musk’s renewed weird behavior torpedoed the recent rally.
TSLA Stock: The Soap Opera Must Go On
For now, TSLA remains a battleground stock that is likely to keep trading around this price, give or take $50 per share.
On the one side, you have Musk’s continued erratic behavior, which surely is scaring off investors. Despite apparent strong quarterly earnings, many market participants were nonplussed. The credit market hasn’t been in a hurry to buy up Tesla bonds either. It’s unlikely that Tesla will repeat its strong Q3 earnings going forward, and Musk’s Twitter outbursts continue to create headline risk for the stock.
On the other hand, hedge funds are trapped in a “big short” against TSLA stock that simply isn’t working. Too many managers see it as a slam dunk bet and thus are overly eager to keep going against it. This has cost them all sorts of alpha compared to the market all year. Their fund clients are getting tired of this underperformance and pulling out their money.
I expect a continued wave of forced short covering to keep a solid bid under Tesla stock in coming weeks. Tesla’s recent drop from $375 to $315 (Ed’s note: TSLA stock is trading at $322.62 as of this writing) offers traders an interesting entry point. For long-term investors, however, Tesla Inc remains a clear avoid. Elon Musk’s leadership leaves much to be desired, and the company’s balance sheet and financials are terrible.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.