The incredible story of Tesla and its soaring share price

by Shaun Richards

This week has seen a continuation of what has become quite an incredible story with various messages for our times. So without further ado let me hand you over to IG Index this morning .

Tesla $800 handle – Market cap now > $140bn

For those who do not follow this sort of thing the share price has passed US $800 which is a further advance on the US $780 close yesterday which itself was a rally of just under 20 per cent on the day. Extraordinary enough in its own way but even more so when we note that the low in the past year was US $176.99

Moving onto the concept of a market capitalisation there is always an issue in using a marginal price for a collective concept and this is even more true here as we note the surge. After all it has gone from around US $32 billion to over US $140 billion inside a year! That provides its own critique. Even more so when we see Tesla is mainly a car company at a time the overall industry is struggling. On that subject Charlie Bilello points out this.

Over the past week, Tesla’s market cap has increased by $40 billion (from $100 billion to $140 billion). For some perspective, Ford currently has a market cap of $35 billion.

A response to this illustrated part of the issue.

Ford’s a dying company bro. I literally do not know anyone who owns a Ford anymore.

😂

yet everyone I talk to is at least intrigued by getting a Tesla ( @RobTheBrave )

 

To which he replied.

Ford sold 2.4 million vehicles in 2019. Tesla sold 367 thousand.

The exchange illustrates another feature of this move which can be highlighted by quoting the Imagine Dragons.

You made me a, you made me a believer, believer
(Pain, pain)
You break me down, you build me up, believer, believer
(Pain)
Oh let the bullets fly, oh let them rain
My life, my love, my drive, it came from
(Pain)
You made me a, you made me a believer, believer

Much of the situation here is binary you either believe or do not and indeed it often feels like something George Michael sung about.

‘Cause I gotta have faith
I gotta’ have faith
Because I gotta have faith, faith, faith
I got to have faith, faith, faith

Tesla

If we switch to its situation there are pretty much as many questions around as there were when the share price was some US $600 lower. Here is FT Alphaville on the profit/loss situation.

Margins have also improved, with Tesla’s 2019 ebitda margin rising 1.5 percentage points year-on-year to 9.1 per cent, and even on a net income basis, Tesla has been posting GAAP profits. Although the margins themselves are not much to write home about, at just 2.3 per cent and 1.4 per cent for the last two quarters respectively.

Despite these positives, top-line growth from its automotive segment also came to standstill year-on-year, as lower asking prices counterbalanced its record deliveries of 367,656 cars.

So some improvement but roaring ahead does not usually come with having to cut your prices. Whilst it made record deliveries they were still less than 400,000 which in the grand scheme of things is not much. Also in a mirror image of the discussion we have had in the past about banks and how it is difficult to get absolute profit figures there are plenty of doubters about the Tesla ones.

The other issue is cash flow as there were worries it would run out. One way it dealt with this was typical in an era of low interest-rates and QE.

Turning to the balance sheet, and Tesla has developed a sizeable cash buffer of $6.3bn, up from $3.7bn at the end of 2018. In part thanks to its improved cash generation, and in part thanks to the $2.3bn it raised in May last year. ( FT Alphaville )

So it borrowed some and on the surface it looks as though cash generation has improved although that case fades once you observe the detail as explained by the FT.

Let’s start with 2019’s free cash flow figure of $973m, which we define as operating cash flow minus both capital expenditure and the net cost for solar energy systems.

The first point is that stock-based compensation, a non-cash cost for a corporate but not a shareholder, came to $898m for the year, or 92 per cent of free cash flow. Of that $898m, just under a tenth of the cost came from Musk’s ludicrous-mode pay packet, revealed chief financial officer Zach Kirkhorn on the conference call. Ex-stock based compensation, free cash flow would have been just $75m.

Hard to believe the rules allow you to do that is it not?

Also FT Alphaville points out that capital expenditure had seen some severe austerity.

In the end, 2019’s capex came to just $1.3bn — a $1bn saving which is roughly equivalent to its total free cash flow.

Kirkhorn acknowledged on the call that Tesla has got better at spending cash, not that impressive a feat given the “ alien dreadnought” production system ended up with Model 3s being made in a giant tent. But spending $1bn less than expected nine months ago is more than just counting the cents.

Yet somehow this coincides with plenty of new products and development.

If Tesla had no new models, or factories, on the horizon this may be more understandable. But this year the Model Y is due to go into production, with the Cybertruck, Roadster and Semi-truck all set to follow in the not too distant future:

How does that work exactly?

Also there are questions to be asked about the inventory.

Even though deliveries exceeded production by 7,204 units, inventory remained flat at $3.5bn.

Comment

Firstly if you have been long Tesla shares or derivatives well played. Now if we switch to the soaring share price there has clearly been a technical influence which has been this.

Investors betting against Elon Musk’s electric-auto maker Tesla collectively lost more than $1.5 billion on Thursday as the company’s stock rocketed higher after its better-than-expected earnings report.

Tesla finished Thursday’s session up 10.3% at $640.81 per share, meaning short sellers betting against the stock lost in excess of $1.5 billion in mark-to-market losses on the day, according to data firm S3 Analytics.

That is from CNBC last week which in this fast moving market is now behind the times but it illustrates the issue and there is more.

In fact, Tesla short sellers are now down more than $5.2 billion this year in mark-to-market losses after losing $2.89 billion in 2019, S3 said. Since the stock’s low of $178.97 on June 3, 2019, Tesla short sellers have covered 19.11 million shares, worth $11.1 billion, and are down $12.43 billion in mark-to-market losses, according to S3′s Ihor Dusaniwsky.

These sort of rallies require people to be short the shares and this is where it gets awkward because many of the reasons for them doing that still exist. But the situation is that this has been a “short squeeze” exacerbated in my opinion by two factors. The first is that many smaller investors and some bigger ones wont sell because they are as I pointed out earlier,

You made me a, you made me a believer, believer

Next in an era of environmentally conscious investing then new investors came in and pushed the stock even higher.

One piece of context is that the car industry seems prone to these sort of short squeezes as we saw this happen to Volkswagen back in the day. How did that turn out?

So my hint for holders is to at least consider the advice of Steve Miller and his band.

Bobbie Sue took the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run

 

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