Tesla Inc (NASDAQ: TSLA) with a combination of weak balance, cash flow problems, apparent excess capacity, uncertainties of emerging demand, increase in negative sentiment, a table of broken values and the still The valuation of "rich" prices makes the stock a convincing short. Further; I am bearish in the company's growth prospects beyond current estimates and I believe that the next lower stage will be driven by macro winds against. The last bearish thing that has crossed my radar is a perspective of the fall of the prices of gasoline. Value conscious consumers will now have one more reason to pbad on Model 3 if the argument for affordability of the electric vehicle and lower cost of ownership is reduced as a point of sale. The margins here matter and Tesla can not afford to lose the impulse to buy a car. I think Tesla has more disadvantages even though it has already dropped by 43% this year. This article highlights my bearish thesis and establishes a target price of $ 120 by the end of this year.
Table of monthly contribution of TSLA shares. source: FinViz.com
May 2019 will be remembered as the month in which the TSLA bears delivered an outstanding roll in their long battle against the bulls. It has been a great commercial action for me in the last five years. The bearish case that for many years was based on the belief that the valuation of TSLA was absurd now, in retrospect, has proven to be true. At the current price of the $ 188 share, TSLA is approaching its lowest level since December 2016. What should worry investors now is that the financial outlook and macro configuration is possibly worse today than when TSLA quoted last time at this level. The company is now more leveraged and faces cash flow difficulties at a crucial moment in the market cycle.
The challenges that TSLA faces are not a secret. Shares have already fallen significantly in 2019, but investors and traders must now badess what comes next. As with many things in finance and economics, the battle here will be fought on the margins. Tesla needs that incremental buyer, that incremental efficiency and the measure of cost reduction, that incremental piece of good news to recover a positive impulse that may not come.
Lower gas prices reduce the affordability gap of EVs
Do not look now, but oil and gasoline futures prices fell 12.3% and 11.2% respectively in the last two weeks. The market is beginning to recognize that, among the rhetoric of the current trade dispute between the United States and China, is the growing concern about a global cyclical slowdown. Clearly, a recession in the US UU Or the much feared scenario of "forced landing" in China is negative for Tesla and the recent price action already reflects some of that. What I am focusing on is the impact that lower energy prices, especially gasoline, will have on that marginal Tesla buyer.
Table of prices of gasoline and crude oil. source: FinViz.com/ author's notes
According to the United States Environmental Protection Agency, the average fuel economy of automobiles has accelerated in recent years and was last recorded at 24.9 miles per gallon in 2017. Typically, the price of retail gasoline has a delay between the wholesale price. The gas price tracking website, Gasbuddy.com, made the following comments, forecasting a downward trend in retail prices.
Average gas prices are likely to fall for the fourth week in a row this week, as last week's drop in oil prices is likely to start pushing gas retail prices. If there is no progress in trade tensions between the United States and China, it is likely that the national average will continue to decline for several more weeks.
A 12% drop in the price of retail gasoline in the next few months could save the typical consumer who drives 13,000 miles per year, approximately $ 30 per month. Whether or not you think this is significant, the fact is that consumers will feel the impact of lower prices and when combined with rising wages in the US. UU It's just one less reason to hurry up and order a Tesla. Once again, listen to me, we're talking about margins. Although the real elasticity of Tesla's vehicle demand relative to gas prices is unknown, the difference between 1-2% of buyers moving away from a Tesla purchase due to low gas prices It could have a significant impact on the feeling. The trend in gasoline prices should be global and not only in the US. UU
Tesla last confirmed the guidance of between 360,000 and 400,000 auto deliveries in 2019, a relatively broad range of 10%. Realistically, a number on the lower end would be seen as a disaster. The order book for Q4 will be equally important. The point here is that if we badume a scenario of increasing trade war, record oil production, refineries that are back online after spring maintenance and the prospect of a global slowdown, all this represents a bearish scenario for the Tesla demand.
The bearish case for Tesla
- Weak balance / cash burned
- Concerns about demand, capacity> demand from 1 to 3 years
- Saturation in key markets (North America / Scandinavia)
- Weakness of the S / X model (the design of the S model is obsolete, even taking into account the recent update)
- The lowest price model 3 cannibalize the potential buyers of the S / X model
- Loss of confidence of Elon Musk (potentially seen as a responsibility given by an error)
- China's cyclical weakness (adjustment of consumer credit / slowdown in growth)
- Fall in gas prices (more inconvenient) keeping marginal customers on the sidelines
I am taking the position that sales and growth in the future will exceed current expectations. Tesla simply expanded its capacity to too large and not everyone wants one, and the macro winds against create a weaker operating environment. Tesla is not immune to a recession and the odds increase. A potential for the much-feared "forced landing" in China could turn the next Shanghai factory as a relic of exuberance. I do not think Tesla will go to zero, but the risks here are significant and we still have not seen the bottom.
The increase in short interest will add to the sales pressure
The last interest in TSLA was last reported on May 15 as yCharts was in approximately 21% of outstanding shares, with a strong increase in recent weeks, consistent with the ongoing sell-off. I hope that in the next short interest update considering data until May 31, this index will rise further as some large cap stocks with the highest interest in the market regularly reach levels above 30%. What I am focusing on is that this metric still has potential. based on the company's own short interest history, which reached 28% in 2012. The current weakness only highlights the lower prices. What this means is that, in the absence of an important catalyst or positive fundamental development, the stock is likely to remain under pressure and under attack. Based on recent commercial actions, the major long-term investors have decided that now is the time to sell.
I am driving a short position in Tesla through options. My target price is $ 120, which represents a decrease of 36% of the current price. I think it can reach that level in the next year. The target price is based on a comparison with Ford Motor Co (NYSE: F) quoted at 1.1x Value of the company to future Income (EV / FWD Revenue). TSLA would be at a multiple equal to F at approximately $ 117. Ford has a better business model and a better product line, betting on low fuel consumption vehicles while incorporating hybrid options. Although I like Ford as a brand, I am not a buyer of the shares here either. The macro case of the bear would have widespread implications for the entire market and, obviously, F would also be affected.
If the actions of TSLA reach $ 120, it can still be said that it is still valued too much. In my opinion, a valuation of $ 22 billion and a gain of 18x in the fiscal year 2020 would be fair. However, the possibility of further deterioration in the outlook and a weaker than expected financial position would open the door to an even greater decline. A global recession could lead the TSLA model to less than $ 50, down 20-30% in sales forecasts. For bears that are shorted and looking for lower levels, the risk is that the macro winds against the current macros turn out to be much less benign than the configuration implies. A quick and favorable resolution with China, the fact that Trump moves away from the tariffs with Mexico, and the better-than-expected operating figures would be positive for TSLA to help the shares find a fund. I think the risks are tilted to the downside.
Revelation: I am / we are short TSLA. I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (except for part of Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.