There aren’t too many stocks today that generate the opinion polarity that Tesla Motors Inc does. While I don’t know a lot of people that actually own a Tesla — one to be exact — he appears to be a very happy camper, and tells me the money was well spent. That seems to be fairly common feedback amongst the small but growing group of Tesla owners.
Talk to a room full of investors, however, and you’ll probably be privy to a much more diversified conversation, with plenty of not-so-nice commentary on Elon Musk and, more generally, the company’s value as an equity investment. In an article I read just today, one money manager went so far to say, and I quote, “Tesla isn’t a business, it’s a cash incinerator.”
Tesla is burning cash
Experienced investors are probably familiar with the notion of cash burn, which refers to the amount of money an upstart that hasn’t turned a profit is spending through to support operations on a quarterly basis. A cash incinerator would probably be a bit harsher reference, with inference to very inefficient internal spending on growth initiatives.
Tesla has burned through about $3 billion in cash in a little less than two years. But the company has also been able to gain liquidity through equity raise and $1,000 refundable deposits on the Model 3.
Clearly not all investors see the company in such a negative light, but given a better than 20% short float on the stock, there is substantial pessimism over the company’s future. Keep in mind that an investor who shorts a stock (borrows shares to hopefully return — or buy back — and profit at a lower price in the future) is not necessarily saying that a company will go belly up. They might simply be making a statement about the company’s valuation in the current market.
With a market cap of $31 billion and a short history, Tesla is not a small company. Comparatively speaking GM and Ford both maintain current market caps of about $50 billion — but they are over 100 years old. Still, with sales that dwarf its more established global automotive manufacturing peers, the longs continue to make a bold statement about Tesla’s disruptive presence in the car industry.
However, when we take a look at a price chart, investor enthusiasm has clearly been at a standstill, with evident indecision over the past three years or so. The stock has traded in a fairly tight $200-250 range for the majority of the time.
I’ve personally avoided the stock, and lack conviction one way or the other where it heads intermediate to longer-term. However, I suspect the going may continue to be somewhat volatile amidst the uncertainty, which has only grown over the near-term.
The company’s recent move to purchase solar technology/panel company SolarCity is yet another move that has put the company squarely in the line of controversy. Still, for visionary investors that see further disruptive synergy in the combo, there’s clearly reason to be fascinated with the potential.
But the cash crunch is starting to evidence itself, as bond investors seem wary of the combined entity, and Musk’s aggressive posturing. Tesla and Musk seem to be scrambling for capital at the moment.
A strategy session for Tesla
I believe Tesla longs need to view a position as very high risk capital, and potentially pair the trade with protective puts. Given the depth of the short interest, however, any positive developments can always lead to dramatic upside should cover occur. A new short would be gutsy with the stock at the low end of recent range, but may be the higher odds option on near-term price movement in my estimation.
Another option for middle-of-the-road, uncertain investors might be a straddle options strategy, which predicts big movement in either direction. However, given the volatility, a $220 Jan 2018 call/put combo would cost $8400 per contract based on current strike midpoint — or about 40% of current market. You’d need to see breakouts to roughly $260 on the upside or $175 on the downside to profit.
The better option for the more nervous nellie may be simply to watch from the sidelines and see how the company evolves. For the moment, that’s what I’ll be continuing to do.
Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.