Why Shorting Tesla Makes Sense Now

There’s no doubt that Tesla (TSLA) makes great products. However, just because a company makes great products, doesn’t mean it is a great investment as well. This is especially true in case of Tesla as shares of the car maker are trading at lofty multiples despite the company reporting losses consistently. I believe it is only a matter of time before reality strikers and shares of Tesla are brought down to a more realistic valuation, which is why I think the stock is a decent short candidate at the moment.

Production problem

As mentioned above, Tesla makes great product.
The demand for Tesla’s Model X has always been high and it is highly likely that the demand for its upcoming Model 3 will be high as well. However, the company doesn’t make any money and has been burning millions of dollars in cash.

The arrival of the Model 3, despite its anticipated success, can make matters worse for Tesla.  Selling expensive products at high margins and low volume is a lot harder than selling cheaper products in high volume and low margins. Hence, the launch of Model 3 may further dent Tesla’s profit margins. That will not be good for investors as Tesla has already lost a lot of money.

Moreover, the company also stopped reporting free cash flow in the latest reported quarter. Free cash flow paint a clearer picture of any company’s future than EBIDTA and GAAP EPS and the suspicious removal of free cash flow from Tesla’s report may point toward darker days.

The elimination probably means that Tesla lost more money than expected and will continue to do so in the future. Hence, I think it would be better for investors to initiate a short position in Tesla, especially given the recent run up in the stock price.

Conclusion

Tesla has been bleeding money and many factors indicate that the company will continue to do so. Although the stock is trading at a premium right now, things can change if the company fails to deliver on its promises.

Given that the company plans to sell cheaper cars in higher volumes, I think its earnings will go down further, which is why I don’t think Tesla will be able to command such a valuation for a long time. Thus, I think investors can benefit from the recent upsurge by shorting Tesla.
Published on Mar 23, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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