Investor's Corner

Former Tesla bear explains why the clock is ticking on TSLA shorts

(Credit: Tesla)

Tesla shares (NASDAQ:TSLA) have largely leveled out in the ~$1,400 per share range following the company’s release of its impressive second quarter earnings. But despite this pullback following its massive run that went as high as $1,794 per share, a former Tesla bear has stated that the company’s critics are still missing the big picture. This is because Tesla will continue growing, regardless of how many times goalposts are moved. 

The run up to the company’s release of its Q2 2020 earnings was bolstered by a lot of momentum, part of which was the company’s potential inclusion into the S&P 500, which seems more likely considering that the electric car maker was able to post a profit in the second quarter. An inclusion into the S&P 500 could provide Tesla with both short term and long term benefits, since TSLA stock could see another run up after massive funds purchase the company’s stock. Long term, an inclusion into the S&P would allow Tesla shares to be less volatile as well. 

One thing that is remarkable now is that Tesla’s uncanny similarities to Apple and Amazon are starting to become more evident. Both Apple and Amazon are performing well in their respective segments, and Tesla seems poised to follow the two companies’ lead. Similar to Apple, Tesla has developed a disruptive new technology. The company is also supported by a strong brand and loyal customers. Its products like the Model 3 are also quite similar to iPhones in the way that they are sleek, powerful, and easy to use. 

Tesla’s similarity with Amazon is a bit more subtle, but both companies have so far prioritized scaling up market share over profits. This was mentioned by Elon Musk in the previous earnings call when he stated that Tesla will not be prioritizing profitability as it grows. Instead, Musk stated that the company would be passing on profits to consumers to scale up market share. Interestingly enough, this is where TSLA bears usually misinterpret the company, with price cuts and other strategies being connected to weak demand instead of optimizations.

“While bears continue to misinterpret this as a lack of demand for their product, it is quite the opposite. As Tesla becomes more efficient at producing vehicles, they find internal cost savings. “Normal” companies would use this opportunity to expand their margin profile and improve profitability. Tesla uses this opportunity to lower pricing, passing on the margin to consumers. This lower pricing leads to increased demand, improving Tesla’s market share dynamics,” the former Tesla bear wrote. 

And here lies what could very well be the fatal flaw of Tesla’s critics. Over the years, and as the company continued to dismantle the bear case against it, the goalposts for Tesla have been moved several times. During its early days, the argument was that BEVs weren’t feasible. When this was proven wrong with the original Roadster, it became replaced with the allegation that Tesla only produces high priced cars. The next came in allegations that the company could not produce a mass market car. 

When the Model 3 was ramped, the goalpost was moved to the argument that there was no demand for a mass market EV. Sure enough, when that thesis was dismantled, the goalpost was moved once more. This time around, the allegation was that the company could not make mass market cars profitably. This was debunked as well, but the goalpost was moved once more to the argument that Tesla’s profits are “manipulated” since it includes BEV credits, which the company earns from other carmakers who are not producing EVs. 

These moving goalposts could ultimately result in some grief for Tesla short sellers. After all, the electric car maker is now in more stable ground. And if it could not be brought down when it was struggling, it would be very difficult to topple it now that its business is stronger. Ultimately, the former Tesla bear noted that with these factors in mind, the clock may very well be ticking on TSLA critics. 

“The clock is ticking on bears and disbelievers in the Tesla story. The company is executing, they are going to be admitted into the S&P 500, their business parallels big tech companies like Apple and Amazon, and bears continually move the goalposts. At a time when Tesla is called one of the greatest bubbles in the market, I would consider it the exact opposite. The recent dip in the stock is an opportunity to buy,” the former bear wrote. 

Disclosure: I have no ownership in shares of TSLA and have no plans to initiate any positions within 72 hours.

Former Tesla bear explains why the clock is ticking on TSLA shorts
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