Thread by @cppinvest

1/ Been reading many a $TSLAQ post that posits this: As long as he can raise, and has the support of the street, the stock stays elevated and the story continues unabated.

I’d like to challenge both suppositions.

2/ In reverse order, the “support of the street” is two-sided. There is the sell-side and there is the buy-side. They are not related. Support from the sell-side means something, support from the buy-side means more. So, what is this support, really?

3/ Tesla’s lead historical underwriter, Goldman Sachs, used to rate Tesla a sell. Currently, it provides no coverage and has no rating but to be blunt: the company that sells the companies securities to the public used to think those equity securities were trash.

4/ No doubt the rest of the sell-side’s bullish coverage enables muppet, day-trading, long momo idiots the cover they need from time to time. Like now, for instance. Little risk of a negative headline from the sell-side (though it grows with every uptick).

5/ But you’ll notice this bullish outlook from the sell-side’s Murderer’s Row hasn’t persuaded any new institutional ownership over the past year. That’s the key. Doubt they ever will because the fundamental story still matters, as does valuation.

6/ Which brings me to my main bone of contention – His ability to raise is not the story now. He has done nothing historically but raise capital. And incinerate it. He used to need it to build out capacity to manufacture and service his poorly-made cars.

He now has to perform

7/ He’s now on the record saying they are at the cusp of perpetual profitability and can fund growth with internally generated cash. Of course that’s a lie and of course he needs capital (just ask the Chinese government). But that’s not the story.

8/ His stock gets hurt when the fundamental picture turns down. When he fired 7% of workforce last January and demand fears crept in, the stock sold off massively. Which is why he hypes demand now. He knows what a demand dip did to his net worth.

This is now a demand story.

9/ In spite of our griping, this stock does react negatively – very negatively – to bad fundamental news. So, the question for everyone is what are the odds and likelihood of more negative fundamental headlines? I would argue high. And with a stock priced beyond perfection?

10/ He has consistently pulled forward demand and he’s running out of levers. Sooner or later sacrificing tomorrow for today as he has done in the Netherlands will catch up to him. Absent fleet sales in NL, Europe deliveries are down q-q.

11/ Think about that: if he does not flood NL to take advantage of an expiring tax credit, this is not even close to a growth story; in fact, it is the opposite. Worse, his mix is now heavily skewed toward lower priced variants which provide little if any contribution margin.

12/ Smart investors know this, which is why no new real institution has entered the name in years. What has impacted this stock more than anything lately is supply and demand. What will an equity raise do?

Add to supply.

13/ In a normal, fundamentally sound business, a secondary would be bought at a slight discount by existing holders because buying secondaries is an easy way to enlarge your position in one bite without moving the market. It’s efficient if it works.

14/ But what happens if investors get it wrong and the company whiffs after a secondary? All those shares bought become instant supply. This is why I am begging him to raise. Given the demand dynamic for his cars, the odds of a post-raise whiff are astronomically high.

15/ All the new buyers turn into sellers not only of the shares they just bought, but probably their core holdings too. Look at the history here: this stock sells off when the headlines are bad. So, what are the odds of future bad headlines? That’s the only question.

16/ Yes, there are many bubble stocks out there that defy gravity, but the market has punished severly many of those that do miss (IRBT, TWOU, HOME, WORK, many others) and Tesla has in fact missed and been punished. Just look back six months.

17/ He is not producing any cars in China now. Chinese demand is weak for the Model 3, in spite of what he says. Sales in Norway are down and it isn’t from NL soaking up all the supply. They were trending down in 2q.

18/ He is using the NL to mask over a pretty fundamentally weak demand picture. He might print a record quarter (I have my doubts). Regardless, he’d better because this stock is priced to perfection and it now is squarely in the spotlight.

19/ The issue isn’t Q4, it is Q1 and beyond. Remember, last year he admitted they were close to hitting a wall. Nothing has changed. This company consumes capital like no other. It can’t support itself from internally generated cash.

20/ But what starts the downward spiral is what always starts it: a fundamental weakening in the company’s business. The buyside will sniff that out and run, and there is nothing the sell-side will be able to do about it.

21/ This isn't 2016 when he can lie about 455k M3 reservations and people believe him. There are now real data points (that he still fudges) that are harder to explain. Why are S/X sales down 50%? Why is Europe ex-NL soft? Why have sales in China been slow?

We might not like the pace at which the market reacts, but it does (and will) react. What would help the shorts more than anything now would be more supply.

Elon will take care of the poor execution himself, that we know. So pray for more supply.