Why Tesla may be the most hated stock in America -- and the most loved
Few CEOs divide the stock market quite like Elon Musk.
On one side are the believers, steadfast bulls who think Musk's Tesla Inc. will make them rich even though, right now, it looks like a money pit.
On the other are the unbelievers, a hard-core legion of shorts who insist financial reality will eventually catch up with Musk and his company.
The rift came to the fore recently when a Tesla manager urged factory workers to prove the "haters" wrong with the new Model 3 electric car. The haters have gained a slight upper hand lately, at least in the equity and bond markets. Investors have placed more bets against Tesla than any other U.S. stock, with short interest hovering around 25 percent, according to S3 Analytics.
Bears were bolstered in March, when Tesla shares sank 22 percent, their worst month since December 2010. An early April statement from the company saying it's speeding up assembly lines to make more Model 3s fueled a partial rebound.
Musk himself even enters the debate on occasion. He pushed back against a report by The Economist on Tesla's cash constraints in an early Friday morning tweet, predicting that the carmaker will be profitable and cash flow positive in the third and fourth quarters and won't need to raise money. The shares climbed as much as 3.4 percent as of 10 a.m. Friday in New York.
And so the believer-unbeliever debate rolls on -- and on and on. The two sides take up miles of digital space on blogs and in chat rooms. Who are these guys?
Ross Gerber, believer, meet Laxman Vembar, hater.
Gerber is co-founder of the investment firm Gerber Kawasaki Wealth & Investment Management, which holds about $10 million in Tesla stock. The company's debt burden doesn't bother him. Nor does the controversy over the company publicly blaming the driver who died crashing his Model X using the Autopilot system, and waging a public feud with the National Transportation Safety Board over an investigation that Tesla is no longer a party to.
What about all those missed production goals for the Model 3? Gerber urges patience. "The shorts are so focused on the numbers that they're missing the forest for the trees," he said. "I invest in themes, and autonomous vehicles and electric vehicles will be the overriding themes for the next decade."
That's all well and good, according to Vembar, but Tesla probably won't generate the cash to be able to create and build the cars of tomorrow. Vembar, a certified financial analyst and co-founder of an investment modeling firm called Fundamental Speculation, is sure Tesla will need to put up better financial results to justify another round of funding, or risk running out of cash before Musk ever gets to make his ambitions a reality.
Vembar points to Tesla's more than $10 billion in debt -- interest payments added up to about $4,300 per car delivered in the fourth quarter -- and the $3.5 billion in cash Tesla burned through last year. The company probably torched another $1.1 billion in the first quarter, the average estimate of analysts surveyed by Bloomberg.
"People who are financially literate know how this story ends," Vembar said.
Vembar and Gerber are emblematic of the battle between the balance-sheet warriors and the disciples -- fan boys, some might call them -- who own Tesla electric vehicles or would dearly love to. This group is convinced that the charismatic Musk, a big-ego innovator, has the battery-charged, self-driving, solar-powered future figured out.
A chief executive officer inspires such fervor only so often. As a tech celebrity, Musk has eclipsed the reclusive late Steve Jobs or nerdy Bill Gates, in the sense that his dreams, including populating Mars and burrowing transport-tunnels beneath Los Angeles traffic, are on such grand scales. He's inspired Hollywood, with Tony Stark in the "Iron Man" movies and Craig Heidecker in the Showtime series "Billions" modeled after him.
"Elon is the key to this whole puzzle, but he's also the risk to it," said Jamie Albertine, an analyst with Consumers Edge Research with one of Wall Street's more bullish price targets on the stock. "It makes him an easy target."
What bugs Tesla partisans is that so many shorts are accountants and other kinds of picayune bean counters, as the believers see them, with a pedestrian concentration on immediate finances.
Bulls like Gerber (who, by the way, is on the waiting list for a Model 3) take the long view: Tesla is uniquely positioned to capitalize on the global shift away from fossil fuels to clean-energy systems because it produces not only electric vehicles but also energy storage systems and solar panels. The gigafactory it shares with Panasonic Corp. is designed to mass-produce lithium-ion batteries for more than just cars.
"In the next decade we think it's all about clean energy. Tesla addresses that," Gerber said last week in a debate on a Quoth the Raven Research podcast. His opponent was Adam Spittler, a certified public accountant with a master's degree in finance who's a vice president at QualTek USA. The podcast host introduced him as someone "with expertise in finding shitty companies with shitty balance sheets."
Tesla is one of those, Spittler said. What's more, the company has been buffeted by management turnover, especially among finance executives whose jobs had been to mind spending and accounting and potentially prepare for raising more cash.
Among the big names on the bear side is Greenlight Capital founder David Einhorn, who's been shorting Tesla and has said it's in his "bubble basket" of tech stocks that are overvalued. Famed investor Jim Chanos, founder of Kynikos Associates, has called Tesla's equity worthless and told Bloomberg News in December that the company is headed for a "brick wall."
Vembar, who said he's a fan of clean energy, thinks the Model 3 could settle the dispute. If the mass-market electric car starts rolling smoothly out the door in bigger numbers, and the line actually makes money, the shorts will get clobbered and Tesla will have no trouble raising the resources it needs, he said. If not, the shorts will win big.
"The Model 3 is make-or-break," he said. "If Musk can show that Tesla is sustainable, he will get fresh capital. But I see no evidence that he can."