Elon Musk Needs Results, Not Excuses

I recently had two long plane rides back and forth to Las Vegas, and I used that time to write down some thoughts on Tesla and CEO Elon Musk. It’s been a while since I updated the blog, so I figured I’d try to get back into the swing of things by sharing my Tesla ramblings here. I figured it was as good a time as any considering Tesla just reported a classic Tesla quarter, complete with an earnings miss, record net losses, huge revenue growth and more promises from Musk. If you’re wondering why Tesla stock is higher by nearly 6% after such a lackluster quarter, pay particular attention to the part of the story where I talk about why it’s dangerous to short Tesla stock. 

Considering the things I’ve read and some of the comments I’ve gotten about Tesla and Elon Musk recently, I felt compelled to take a stab at clarifying some of the things about the company and its stock that some investors seem to misunderstand. If there is one single message I’d love each and every Tesla investor to take away from this story it is that Tesla the company and Tesla the stock are two completely different entities which have extremely different measures for success.

Fake News

Elon Musk is one of the most outspoken CEOs in America and rightfully has one of the largest followings in the business world. After all, Musk has some very revolutionary ideas involving the future of mankind and could ultimately end up in textbooks for his work on renewable energy, space travel, artificial intelligence and other fields.

But there’s no question Tesla has struggled with ramping up its Model 3 production, and Tesla investors have struggled right along with it. Tesla stock is down more than 6 percent in the past year. As a result, Musk has repeatedly taken his frustrations out on two groups : the media and short sellers.

First, as a journalist for U.S. News & World Report and Benzinga, I am presumably one of people Musk is talking about when he tweets things like the following:

“The holier-than-thou hypocrisy of big media companies who lay claim to the truth, but publish only enough to sugarcoat the lie, is why the public no longer respects them…Tricky situation, as Tesla doesn’t advertise, but fossil fuel companies & gas/diesel car companies are among world’s biggest advertisers.”

Here’s the thing. Are there bad journalists? Absolutely. Are there journalists out there getting paid under the table to trash Tesla? Probably. But the same can be said of any large-cap stock in the market.

I’ve written all kinds of negative stories about Tesla. I have no long or short position in Tesla and never have. My editors have never instructed me to take a negative angle on Tesla to please advertisers or for any other reason, for that matter. In fact, none of my editors ever mention specific advertisers or give me any impression that sponsors play any role in the subject matter of any of our stories. The only thing that has been important to any of the organizations for which I’ve worked is that stories be informative, accurate and, most of all, get a lot of page views.

Fortunately for Tesla, which doesn’t spend money on advertising, people are very interested in the company. Musk deserves a lot of credit for his masterful branding of Tesla and himself, and people care about the company. That means journalists like me love to write about it.
If Musk wants to point out factual errors in specific stories and/or patterns of misleading information in stories by specific journalists, I think that’s more than fair.

Based on my firsthand experience, implications that journalists are beholden to oil companies is simply not factually accurate.

Unfortunately, the “fake news” argument has worked wonders in the world of politics because it enables people’s confirmation bias. The idea that the media is lying to the public allows people to believe stories they like and dismiss ones they don’t. The same is true about Tesla. If Tesla investors believe that there’s a media conspiracy against Tesla, they can dismiss the stories of production problems and balance sheet concerns as “fake news.”

As smart as Musk is, I have a hard time believing he doesn’t understand this phenomenon. However, as a Tesla investor, I would certainly be questioning how wise it is to make enemies of the media, especially when Tesla has a limited marketing budget and relies so much on the value of its brand.

Evil Short Sellers

The second group Musk likes to lash out at is short sellers, particularly Wall Street analysts who have sell ratings on Tesla stock. Musk’s argument is that short sellers are “jerks who want us to die.”

According to the latest data from S3 Analytics, it’s true that Tesla has the third largest outstanding short position of any company in the entire world. There is a lot of money being bet against Tesla. But short sellers don’t target companies because they hate the CEO or they want the company to fail. Short sellers target companies that they see as vulnerable and they target stocks that they see as overpriced. Short sellers certainly have an agenda, but it’s not about killing companies. It’s about making money.

S3’s data shows there’s only one U.S.-listed company in the world with a larger short position than Tesla: Alibaba. However, unlike Tesla, Alibaba stock is up 24 percent in the past year, and Jack Ma never uses short sellers as an excuse.

Musk seems obsessed with Tesla short sellers, often taunting them when he feels things are going well and blaming them when he needs an excuse.

But one thing Musk recently said about shot sellers was particularly puzzling to me.

“They have about three weeks before their short position explodes,” Musk tweeted on Jun 17.
This tweet suggests Musk may not fully understand how Wall Street actually works. If Musk thought finally hitting Tesla’s 5,000-per-week Model 3 production target six months late was going to generate a positive market reaction, he was way off base.

This is the first distinction between Tesla the stock and Tesla the company. For Tesla the company, finally hitting a major production target is a huge accomplishment. Musk and his employees deserve to be proud. Tesla the stock was already priced for 5,000 Model 3s per week back in December when Musk first told investors the company would hit that number. Stock prices don’t react positively when a company does what it said it was going to do. They only react positively when a company says it’s going to do something that investors were not expecting. For example, if Tesla has reported it produced 6,000 Model 3s in the last week of June, the stock would likely have soared on the news.

Instead, Tesla opened a new makeshift assembly line and Tesla employees reportedly worked mandatory six-day weeks and up to 12-hour shifts to hit the 5,000 mark. Musk was also reportedly on the assembly line screaming at engineers and pulling workers off of the Model S and Model X lines to hit the 5,000-vehicle mark.

Understandably, Wall Street analysts were not particularly encouraged by these reports and issued a number of notes to investors questioning the near-term sustainability of Model 3 production and Tesla’s ability to hit Musk’s targets of profitability and positive cash flow by the third quarter.

Analysts To Blame

Musk has often lashed out at Wall Street analysts for their negative opinions of Tesla, but, like the short sellers, analysts don’t issue sell ratings arbitrarily. And it’s not just a handful of analysts that are targeting Tesla. According to CNN Money, Tesla currently has eight Buy/Outperform ratings, 10 Hold ratings and eight Sell/Underperform ratings. Wall Street simply doesn’t know what to make of Tesla stock. It’s not just one or two analysts who don’t like the company.

In other words, a lot of people whose job it is to understand the market say Tesla stock is too expensive. Sure, Wall Street analysts aren’t perfect in the same way journalists aren’t perfect. But if analysts have biases at all, it’s that they tend to be too bullish, not too bearish. The idea that there’s a handful of “evil Wall Street analysts” our there targeting Tesla is not how I see it. There is a clear bear case to make for Tesla stock being too expensive. I tend to agree with this case.

One final note on analysts and negative Tesla media coverage. Journalists report the news, and analyst research notes are major news for investors. There has been a ton of negative media coverage of Tesla in the past year. But a journalist covering a negative analyst report from a firm like Goldman Sachs is not fake news, and it is not negative bias on the part of the journalist. It’s just reporting the news.

Two Birds With One Stone

If Musk is right about Wall Street analysts and evil journalists and short sellers, there’s a simple solution: do what Alibaba does and prove them wrong. Meet (or beat) your financial targets, improve your cash flow, grow your profits and dominate the competition. Short sellers don’t like losing money, and Wall Street analysts don’t like losing their jobs. Give short sellers a reason to close their positions. Threatening short sellers on Twitter is not accomplishing anything other than making Musk look ignorant and unprofessional. If Tesla delivers on Musk’s promises, the short sellers will move on to greener pastures. Upgrades by the very same Wall Street analysts Musk has bashed will serve as bullish catalysts for the stock. There’s a reason why other CEOs don’t talk about short sellers. There’s a simple solution.

Tesla Stock Versus Tesla The Company

Now that I’ve covered two of Elon Musk’s favorite excuses, I’d like to conclude by explaining why most Tesla bears have nothing against Tesla the company. I consider myself a Tesla bear, and I root for Musk to succeed. To understand why so many people are betting against Tesla stock, you need to go all the way back to 2014. Over a two-year stretch,from January 1, 2013 to January 1, 2015, Tesla stock rallied an incredible 556 percent.

Seemingly overnight, this tiny, underdog tech company with no meaningful market share, horrible financials and a spotty track record of hitting production targets had a market cap the size of iconic global auto companies making billions of dollars in annual global sales and raking in huge profits.

To a lot of people (myself included), it seemed as if the market had gotten carried away with Musk’s cult of personality and the feel-good story of the alternative energy underdog turning the evil oil industry on its head. I get it. I always root for the underdog. But it’s not always smart to bet on the underdog. In fact, when someone is an underdog, by definition success is a long shot.

In the three years that have followed, Tesla has grown its revenue and production numbers significantly, but it has shown little progress on improving its margins or moving toward profitability. In addition, it has had plenty of issues with its production process and its autonomous vehicle technology has fallen behind its peer group, according to Navigant Research.

Last year, General Motors (GM) reported $145.6 billion in revenue and $12.8 billion in pre-tax profits. Ford (F) reported $156.8 billion in revenue and $8.4 billion in pre-tax profits. In 2017, Tesla reported $11.8 billion in revenue, and the company has yet to report a single profitable quarter.

The market currently values GM’s business at $52.0 billion, Ford’s at $38.8 billion and Tesla’s at $49.7 billion.

Earlier I said stocks tend to be priced based on where investors see a company in the future rather than where a company is now. Tesla stock is priced based on the market’s belief that at some point down the line, Tesla will be Ford or GM.

But even if you believe that conclusion to be true, there’s a problem with buying or holding Tesla stock based on that idea. If the expectation for Tesla to be the next Ford is already priced into the stock, why would the stock go any higher? For Tesla shares to rise, the company will need to convince investors that it will be bigger, better, more profitable and more successful than Ford or GM. In my opinion, it’s a long shot for Tesla to even approach Ford and GM’s level, much less leave them in the dust.

Perhaps the most succinct explanation of the Tesla bear thesis came from Musk himself last July.
“I’ve gone on the record several times that the stock price is higher than we have the right to deserve and that’s for sure true based on where we are today,” Musk said at the time.

Tesla bears simply believe that statement is still true today and will likely still be true a year or two from now.

Why Not Short Tesla?

You may wonder, if I’m so bearish on Tesla stock, why don’t I join the Tesla short sellers? I have exactly one reason not to short Tesla stock, and it’s good news for Tesla bulls. Ironically, stocks with the largest short positions are some of the most dangerous stocks to short.

A large short position (once it’s already established) can be like a life preserver for a struggling company. Any time a heavily-shorted stock starts to fall, there are thousands of short sellers out there itching to cover their position and lock in their profits. Of course, for a short seller to close out a position, he or she must buy shares of Tesla stock. In other words, in addition to normal “buy-the-dip” investors, Tesla gets buying support from short sellers any time its stock has a large decline, which can serve to support the share price and prevent it from declining further.
Conversely, if Tesla can get its act together and significantly outperform its expectations at some point, a sharp rise in share price could trigger a massive short squeeze that would inflict heavy losses on short sellers and force them to exit their positions. This would certainly be a satisfying outcome for Musk and Tesla bulls, but it is also makes shorting Tesla extremely dangerous.


In a nutshell, here’s my take on Tesla stock: there is no large-scale media, Wall Street or short seller conspiracy against Tesla. Wall Street is bearish on Tesla for good reason, and journalists like me report what those analysts say, good or bad. Any good journalists or reputable news organization will correct any factual errors in reporting. Beyond that, the news is the news. Things haven’t been going according to plan for Tesla, and the negative media coverage reflects that reality.

Tesla stock is too expensive based on what the company has achieved. Musk has admitted as much in the past, and I think nothing has changed in the past year to negate that belief.

Shorting Tesla is a dangerous bet, but buying or holding Tesla shares is just as dangerous until the company can show meaningful progress in ramping Model 3 production and sales to a level where they approach the numbers put up by GM and Ford. Tesla also needs to demonstrate it can turn a profit and be cash-flow positive before it runs into difficulty raising additional capital.

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