Betting Against Tesla: Skeptics Make Their Case

Betting Against Tesla: Skeptics Make Their Case

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Tesla's China headquarters in Beijing. Investors betting against Tesla say they base their view on cold financial calculations, including its debt and the rate at which it is consuming cash.

For the past year, Elon Musk has waged a bitter war of words with short-sellers, the investors who are betting billions of dollars that Tesla will fail.

On Twitter and in interviews, he has called them haters and jerks who know little about electric cars. He has accused them of spreading false information and amplifying negative news about Tesla in hopes of dragging down its stock price. Their goal, in Mr. Musk’s view, is nothing less than Tesla’s destruction.

George Noble doesn’t fit that description. Manager of his own hedge fund, Noble Capital Advisors, he rarely comments on Tesla in public or on Twitter, and he comes with an impressive pedigree. He has been following and investing in car companies for nearly 40 years, having started his career an auto analyst and then a rising fund manager at Fidelity in the 1980s.

“I’m not one of these individuals with superficial knowledge who’s tweeting garbage on Twitter,” said Mr. Noble, 61. “I’ve followed this industry a long, long time. I’m not a bomb-throwing hack.”

There’s no doubt Tesla and Mr. Musk, the company’s high-profile chief executive, have plenty of detractors, especially on Twitter, where some critics trumpet vitriol and unsubstantiated information about the company and its business. But many of those who believe that Tesla is destined for a major restructuring — or even collapse — are buttoned-up investors. They base their view not on antipathy for Tesla or Mr. Musk, but on cold financial calculations, including its heavy debt load and voracious cash burn.

“This isn’t only about Musk,” said Mark B. Spiegel, a managing partner at Stanphyl Capital, which has a large position shorting Tesla. “It’s about a terrible capital structure, because of the debt, and a stock price that is out of whack with the demand for the product and the competition that’s coming in.”

Mr. Spiegel said he had spoken out to “educate people” about Tesla’s finances. “I’m just putting facts out there that counter the claims Musk puts out there,” he said. “We don’t make up reasons to short something.”

Tesla did not respond substantively to a request for comment for this article.

Here are some of the reasons that skeptics like Mr. Nobel and Mr. Spiegel offer for their position.

Unlike Mr. Noble, Mr. Spiegel regularly tweets about Tesla and makes no secret of his skepticism about the company and Mr. Musk. He acknowledges that his fund was “massacred” by the surge in Tesla’s stock price in the second quarter, but believes his short position will pay off in the end.

The main reason that Tesla is the most shorted stock on Wall Street is its market valuation of $50 billion. Until recent declines in its stock, Tesla was worth more than General Motors. But in 2017, G.M. sold 9.6 million cars and trucks and made $12.8 billion in pretax profit. Tesla sold just over 100,000 cars in 2017, and lost $2.2 billion.

Mr. Noble said the image of an unprofitable company with a lofty market value harked back to the dot-com era, when enthusiastic investors drove up the stock prices of even start-ups that had no revenue and no profits.

“It’s not that I don’t like Tesla,” he said. “The cars are cool — the acceleration, the torque.” But a struggling, highly leveraged company with a valuation of $50 billion, he said, is “one of the biggest bubbles in the market.”

REASON 2

The company is burning through cash

The argument against Tesla almost always cites its finances — whose shaky state, Mr. Spiegel contends, is often obscured by the hype over its cars and by Mr. Musk’s own tweets and ambitious ideas, such as an electric semi truck and his hope to transport people through networks of underground tunnels.

With cars priced at $70,000 and up, a company selling more than 100,000 a year would normally rake in hefty profits. But Tesla still spends more money than it takes in, consuming nearly $1 billion every three months.

Tesla had $2.2 billion in cash at the end of June, but needs more. About half the cash is restricted, because it comes from customer deposits that it may have to refund if customers decide not to buy. The accounts-payable line on its balance sheet shows Tesla also owes its suppliers and other contractors $3 billion. It has a convertible bond payment of $230 million due in November and another of $920 million due next March.

A tent set up at Tesla's factory in Fremont, Calif., to augment production of the Model 3. Elon Musk has tied his company's profitability to a sharp rise in Model 3 sales.

Mr. Musk has vowed that a sharp increase in sales of the Model 3 sedan in the current quarter will drive up revenues enough to make Tesla profitable and provide the funds it needs, but short-sellers are skeptical.

Gabe Hoffman, 41, a partner at Accipiter Capital, which has shorted Tesla, points to the ratio of how much cash Tesla has and could access quickly and how much it owes in the short term. Because of its shortage of cash and all its liabilities, “Tesla looks worse than General Motors one quarter before it filed for bankruptcy,” Mr. Hoffman said.

Beyond the headline numbers, short-sellers point to other, less visible concerns. Vincent Wolters, an individual investor who lives in Zurich and has shorted Tesla shares, has written detailed reports showing that Tesla’s costs have been rising even as it makes more cars — the opposite of what profitable carmakers experience. Expenses for sales, general and administrative costs were more than Tesla's gross profit in both of the last two quarters, when it was making more cars than ever.

“To me that doesn’t sound like a good long-term business model,” Mr. Wolters said.

REASON 3

Elon Musk does not inspire confidence

Marc Cohodes, a former fund manager now investing on his own, decided to short the stock in August, prompted by an interview with The New York Times in which Mr. Musk was described as alternating between laughter and tears while describing an “excruciating” year that had taken a toll on his physical and emotional well-being.

Mr. Musk at a meeting with state governors last year. The Securities and Exchange Commission is looking into a claim he made in August about having "funding secured" to take Tesla private.

The interview took place after the chief executive tweeted that he planned to take Tesla private at $420 a share and had “funding secured,” a statement that has prompted the Securities and Exchange Commission to investigate whether he had misled investors, possibly violating securities laws. Two weeks later, Mr. Musk smoked marijuana during an interview shown on YouTube.

The chief of any company needs to be disciplined and to “execute at a high level,” Mr. Cohodes said. But the string of recent events has convinced him that Mr. Musk is “not mentally fit” to deal with all of Tesla’s challenges successfully. “I view Elon as a tragic figure,” he added.

The New York Times, citing three people familiar with the thinking of board members, reported last month that some had grown alarmed by what they saw as Mr. Musk’s erratic behavior. But after the reversal of his plan to take the company private, the independent directors — all those aside from Mr. Musk and his brother — declared, “We fully support Elon as he continues to lead the company moving forward.”

REASON 4

There are questions about demand for Tesla’s cars

For Mr. Noble, the biggest doubt about Tesla is whether consumers are actually clamoring to buy its cars. The company has reported that more than 400,000 people have paid deposits of $1,000 each to reserve Model 3s.

“That suggests that every car they make has a paying customer waiting for it,” Mr. Noble said. “That is the heart of Tesla’s story. That’s why people buy the stock, because it looks like they have unlimited demand.”

But some recent actions by Tesla suggest that may not be the case. The weekend after Labor Day, it held a “sales event” at its plant in Fremont, Calif., allowing deposit holders to stroll among several hundred cars and pick one to buy. Hundreds more have been parked for weeks at lots in Burbank and Lathrop, Calif.

On Friday, Tesla sent an email to customers and deposit holders inviting them to test drive a Model S or X overnight — the kind of marketing event that car companies organize to drum up sales.

“That’s inventory,” Mr. Hoffman said. “Everything they produce is supposed to be delivered or in transit on the way to the customer. If there’s nothing wrong with demand, why are there all these cars in Burbank? Something doesn’t add up.”

Asked to address the doubts raised about inventory, as well as Tesla’s finances and demand for its cars, the company’s chief spokesman, Dave Arnold, sent a one-sentence reply on Saturday: “We will get back to you shortly.”

The italics emphasizing the adverbial form of “short” were left to interpretation. By Sunday evening, Tesla had not responded further.

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