Why Go Long Tesla: The Leveraged Approach

In a previous article, we had made a case for shorting TSLA stock via our inverse short ETP “TSLS”. However, it’s not all doom and gloom for the mercurial automobile manufacturer. The company has a new production facility coming up in the vicinity of the industrial heart of Europe: Germany.

Giga Berlin

Tesla Gigafactory Berlin-Brandenburg is currently under construction in Grünheide, 35 kilometres south-east of central Berlin on the Berlin–Wrocław railway. Announced by Tesla CEO Elon Musk in November 2019, the factory is planned to produce batteries, battery packs and powertrains for Tesla vehicles. The plant will also assemble the Tesla Model Y with an initial planned capacity of 100,000 vehicles, which will be ramped up to eventually to 500,000 vehicles per year.

According to a January 2020 publication by the local environmental agency, the factory is expected to begin operations in July 2021.

Tesla Sales in Europe

A total of 1.42 million battery-electric vehicles (BEV) and plug-in hybrid vehicles (PHEV) were sold in 2020, representing a 147% year-on-year increase. This sharp rise is attributed to increasing availability of BEVs and PHEVs as well as a regulatory push on manufacturers to increase sales of low-emission cars in order to avoid EU emissions fines. Both BEV and PHEV categories combined accounted for 12% of all cars sold across 23 European markets, including the European Union member states, the UK, Norway and Switzerland. Tesla currently imports its vehicles into Europe for sales and distribution. In 2019, Tesla sales rose dramatically relative to 2018 but it closed 2020 with marginally fewer cars sold relative to 2019.

Despite the sales being lower in number, it can be seen that Tesla’s share of the total car market in 2020 (not just in the EV category) is actually higher than in 2019. This is due to the fact that the global pandemic had an adverse effect on all vehicle sales that only began to ease off in the closing months of 2020. This can be evidenced by extremely strong vehicle sales in January 2020 followed by a very sharp fall in subsequent months.

This list of top destinations hasn’t changed significantly in 2020 either but the company faces stiff competition from two powerhouse manufacturers in the region: Renault and Volkswagen. Together, these two brands commanded nearly 45% of all EV sales in Europe in 2020 (relative to Tesla’s 20%).

In terms of top countries for Tesla vehicles, Norway, Netherlands and Germany had remained a steady fixture in the Top 3 of 10 across both 2018 and 2019.

This list of top destinations hasn’t changed significantly in 2020 either but the company faces stiff competition from two powerhouse manufacturers in the region: Renault and Volkswagen. Together, these two brands commanded nearly 45% of all EV sales in Europe in 2020 (relative to Tesla’s 20%).

The Renault Zoe overtook the Tesla Model 3 to become the top-selling BEV in Europe in 2020, with Volkswagen also looking to rapidly close the gap with its ID series as well as the Audi E-tron series. Volkswagen’s e-car plant in Zwickau went online in August 2020 and aims manufacture up to 330,000 vehicles per year covering six e-models from three Group brands by mid-2021. So, in terms of competition, Tesla is not going to have a cakewalk over its rivals in Europe.

However, if the strong interest seen in Tesla in January 2020 relative to the same month in 2019 is any indicator of public interest in its offering, then its brand equity is in relatively good shape. It is no great leap to state that establishing a production line in Europe will only help bolster sales further.

A Hypothesis for Tesla’s Stock Performance

The competitive landscape, on a macro level, bears some similarities with the case when Tesla entered the Chinese market: local brands are strong on the ground while Tesla has a certain “public charm” associated with its brand.

Satisfying sales demand by importing from the company’s Giga Shanghai might not be a strong alternative: it had already been reported that the Chinese-made vehicles are much heavier than the US-built models owing to their use of lithium ferrophosphate (LFP) batteries (a heavier weight would lower the vehicle’s effective range). So, any ramp-up in meeting sales demand would likely hinge upon Giga Berlin’s in-house battery/battery pack production capacity. In this regard, Tesla’s Berlin conundrum is similar to its Shanghai conundrum: importing vehicles from the US into China attracts massive import duties, thereby increasing the burden on Giga Shanghai to attain a high degree of self-sufficiency. By centering both battery and powertrain manufacturing in Giga Berlin, the company’s Europe operations is pre-emptively enabled to attain a high degree of self-sufficiency.

Interestingly, the month-on-month performance in Tesla’s stock price over January and February of 2020 has a fairly strong correlation with May and June of 2019 – about 5-6 months before Giga Shanghai went into full production mode.

So, if:

  1. We assume that Giga Berlin will be announced ready for operation on July 15, 2021;

  2. We hypothesize that Giga Shanghai and Giga Berlin are similar in terms of market pressure and operating conditions (i.e. high degree of self-sufficiency, limited imports, etc) and;

  3. We assume that stock performance from current date till July 2021 is assumed as being similar to historical stock performance from July till Oct 2019 (Giga Shanghai opening month) based on 2. and the similarity in month-on-month stock performance in January/February 2021 versus month-on-month stock performance in May/June 2019

we can build the hypothetical stock performance trajectory thus:

Note: This is only a hypothesis on how the stock MIGHT perform. This is not meant to be a prediction of future performance.

One factor in Tesla’s advantage is its strong cash reserves available (especially when compared to 2019). Therefore, it can be assumed that the company will have no problems in aggressively pushing for sales once production begins in Giga Berlin.

Our Tesla ETPs

Tesla holds a unique place in our product development: we offer leverage factors in 3X (TSL3), 2X (TSL2), -1X (TSLS) and -2X (TS2S). This underlines our strong beliefs in the interest the company commands among investors and our faith in the company’s ability to deliver value.

We also offer a wide variety of short & leveraged products – altogether 65 in total – underlying top-of-the-line companies operating in a variety of sectors. An astute investor with an eye of the market is bound to find a product catering to a strategy of their liking in a very cost-efficient manner.

Investors can review our full list of product offerings and subscribe to our mailing list to keep in touch with us.

Education Series: Single-Stock ETPs

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