Citron Research Is Right About Tesla This Time

Shares of Tesla Motors (TSLA) took a minor hit earlier this week when Citron Research tweeted that it had initiated a short position in the stock. Citron claimed that Tesla will run into a supply and demand problem and will probably fall to $100 by the end of 2016.

This is not the first time that Citron has recommended shorting Tesla. The firm targeted Tesla back in 2013, and although its short position didn’t play out too well in 2013, I believe Citron may be right this time around. I also recommended shorting Tesla a few months ago when the stock was trading close to $230.
Although Tesla now down over 10% since my first short call, I think it has a lot more room to fall and Citron’s $100 target may be too conservative as the company’s shares can fall further.

Supply & Demand problem

The primary reason why Tesla commands lofty fundamentals is its strong revenue growth. Tesla has been growing at a compounded annual growth rate of over 50% and aims to maintain the growth rate for the foreseeable future. However, Tesla’s plans can hit a roadblock as the company has been struggling with production issues for quite some time.

While the demand for Tesla’s cars is strong, the company has been unable to fulfill the demand due to production inefficiencies. Supply constraints had a huge negative impact on Ford (F) as the company struggled to meet the demand for its F-150 truck last year, and as a result, the stock lost has given up considerable value over the last few months.

Production constraints can hinder Tesla’s growth plans and can considerably knock down the stock’s valuation in the near future.

Model 3 buzz will die

Tesla has promised to unveil the $35,000-worth Model 3 car by the end of March. Although Tesla is on track to unveil the car later this month, it could spell trouble for the company in the long-run. Tesla has struggled with profitability and is losing money at a fast rate. The company’s gross profit margin stands at -22%, whereas its operating margin is also -17.71%.

Tesla has struggled with production when it was selling luxury cars in lesser numbers. However, its supply constraints will get worse with the arrival of Model 3. Not to mention, the cheaper cost of the Model 3 will further degrade Tesla’s profitability. Selling cheaper cars in high volume is lot more difficult than selling luxury cars in less volume. Hence, I think the Model 3 will turn out to be disastrous for Tesla in the long-run, which is why I think Citron’s $100 price target for Tesla may be too lenient, and the stock could fall further by the end of 2016. Hence, I think investors should short Tesla.
Published on Mar 4, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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