The Man Who Predicted the Housing Market Crash Just ‘Went Short’ on Tesla
By: S I Ahmed
Tags: Money, Startup, Finance, Investing, Business

If there’s anything that I have learned in my investing journey thus far, it’s been to ‘never bet’ against Elon Musk. Whenever the skeptics went ‘short’ on Tesla a vast majority of traders had lost money betting against this “extraordinary billionaire visionary”.

In short Elon Musk can be compared to a ‘real-life Tony Stark’: “Genius, Billionaire, Playboy, Philanthropist”.

But Dr. Micheal Burry who is well known for his bets against big banks during the 2008 housing market crash has recently gone on Twitter to express his views about Tesla, and this clash of the titans has Wall Street in shackles.

According to a recent tweet, the veteran investor stated the following:

“So,@elonmusk, yes, I’m short $TSLA, but some free advice for a good guy… Seriously, issue 25–50% of your shares at the current ridiculous price.That’s not dilution. You’d be cementing permanence and untold optionality. If there are buyers, sell that #TeslaSouffle”

Image taken from Dr. Burry’s Twitter account on December 2nd, 2020

When taken at face value the tweet can simply be viewed as a clash of egos between two “gurus” who both know their game well. But besides the tweet, Dr. Burry had posted a spreadsheet that had details of all the leading auto manufacturers in the world alongside Tesla, to justify his hypothesis.

Dr. Burry’s main hypothesis was the fact that the revenue, EBIT, and total market capitalization for the 32 leading auto manufacturers were $2.28 trillion, $99 billion, and $806 billion, whereas for Tesla the revenue, EBIT, and total market capitalization were $24.5 billion, ($69 million) and $438 billion.

In a nutshell, if you see the numbers from a valuation perspective you are essentially paying roughly 50 percent more than Tesla to acquire a stake in all the other 32 auto manufacturers, and in the process, you’d have gotten 90 times more in revenue!

Shares of Tesla Inc. (NASDAQ:TSLA) plummeted by 7.4 percent early Wednesday morning but recovered slightly towards the end.

This is essentially what short-sellers benefit from!

In simple terms, when you are selling short a particular stock you are betting against the stock price going up. The simplest way to profit is to sell the shares at a high price to repurchase them later at a lower price, and the “short-seller” pockets the difference.

The one thing which needs to be kept in mind is that the shares that were sold short, are in most cases borrowed from someone else. Thus it is essential to buy the shares back later so that the short position can be closed. Thus, if the shares continue to go up in value, then the short-seller inevitably misses out on any kind of profits whatsoever.

What we don’t know is how long Dr. Burry plans on keeping the short position ‘open’.

A few weeks prior to Tesla’s stock split the share price rose to a whopping~$1,100, (it surged even further before the stock split) taking the company’s market cap to an incredible ~$209 billion. This put Tesla roughly $6 billion ahead of Toyota back then, making it the most valuable automaker in the world!

Tesla’s massive ambitions were initially heavily reliant on the success of the Model-3, an affordable mass-market electric car that was supposed to revolutionize the auto industry.

Elon Musk had outlined this in his master-plan memo way back in 2006 —

“The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down the market as fast as possible to higher unit volume and lower prices with each successive model. Step 1: Build a luxury electric sports car that could make some money. Step 2: Use the revenue from selling the sports car to create a more affordable luxury sedan. Step 3: Once the luxury sedan takes off, use proceeds from this sale to market and sell a truly affordable electric car that the masses could afford”.

Elon Musk bet the entire company’s future on this little dream due to which he even upgraded the manufacturing facilities and invested heavily in new factories. However, the significant delays in delivering the end-product to customers had produced a backlog in terms of both expectations and revenues later on.

In March 2016, when the company started accepting reservations for the Model-3, more than 325,000 bookings — roughly $14 billion in implied future sales meant that the company had to ramp up its facilities even further to churn out more than 5000 Model-3’s just to break even. This, later on, gave rise to what Musk had referred to as “production hell”.

As an article in Wired previously quoted —

Even Musk had conceded that the company’s fully automated factory vision, the “alien dreadnought,” wasn’t working. Workers ripped out conveyor belts inside the Fremont plant. Employees began carrying car parts to their workstations by hand or forklift and stacking boxes in messy piles. At one point, Musk halted production for an entire week to make repairs. On some level, Musk seemed to recognize that he was undermining Tesla. “Excessive automation at Tesla was a mistake,” Musk tweeted. “To be precise, my mistake.” He once told a colleague: “We just have to stop punching ourselves in the head.”

Observing the chaos Wall Street started aggressively shorting the stock back then, and it was more or less guaranteed to make traders a hefty profit by betting against Musk’s capabilities.

The same premise now seems to come back into play and when you combine that with the backlog of orders, Dr. Burry’s bet, and the email sent to Tesla employees regarding cutting costs, the possibility of Tesla stock getting “crushed like a souffle under a sledgehammer” does seem to make sense.

What will be interesting to see is if investors actually manage to recognize the company’s potential as a leading battery manufacturer and alternative energy provider heading into the future or will they continue to take a “short-sighted” trading approach based on daily price fluctuations.

With Goldman Sachs upgrading their price target for Tesla to $780 observing their EV growth Wall Street will be at a crossroad for the next few weeks to come. “ To go long, or to go short”? That is indeed the question.