A Tesla Short Can Still Reap ProfitsTSLA) shares are over 15% off from their 52-week high mark of $286. The stock has lost considerable value ever since consumer group Consumer Reports dropped its recommendation of Tesla’s Model S car on the basis of a series of customer complaints in October. Shares have failed to recover since the drop. Although Tesla has fallen considerably, I think the stock is still overvalued. A Tesla short can still reap about 30% profits, which is why I think investors should bet against the stock.
Cheaper oil is a Headwind
Oil prices are hovering near 7-year lows, and I believe this plunge will hinder the growth of renewable energy.
In the latest meeting, OPEC decided to keep production steady. The oil market is currently plagued with oversupply and the scenario expected to stay the same for at least a few more months. This will keep a lid on crude oil prices, which consequently will hurt Tesla sales.
Tesla is currently way overvalued and the weak oil environment will make it impossible for the company to justify its current valuation. Tesla has a market cap of over $30 billion, but the company only sells a few thousand cars every quarter. Investors have already priced in great growth into Tesla’s present share price, and even if everything goes exceptionally well, Tesla will have a hard time growing into its current valuation.
Debt and Unprofitability
Like many growing companies, Tesla has focused on extensive expansion and has neglected profits. As a result, the company has a debt of nearly $3 billion. The debt isn’t huge, but it is increasing consistently as Tesla has been unprofitable for a long time. The company is burning through cash at a very fast rate. The company has spent billions of dollars to expand, but it is still selling a fraction of cars that other automakers sell.
I have my doubts regarding Tesla’s long-term prospects. I don’t think Tesla’s business model is sustainable. Given the rate at which Tesla is burning money, it will soon run out of cash. For a unprofitable company with increasing debt, Tesla is trading at an extremely overvalued sales multiple and is a good short.
I don’t think Tesla will be able to grow into its current valuation. The stock possesses immense downside potential, which is why I think investors should initiate a short position. Tesla’s lack of profitability and increasing debt will take a toll on the share price in the long-run and the stock is destined to fall, making it an ideal short candidate.
Published on Dec 10, 2015By Ayush Singh