How to Short Tesla: The Simpler Approach

2020 has been a stalwart year for Tesla. The company delivered 499,550 vehicles in 2020 and estimated profit per vehicle finally became positive in Q1 2020 at around the $3,000 mark. Its stock price climbed 743% over the year and its automotive segment – which accounts for 94% of the company’s total revenues – posted a gross profit of $6.6 billion (up 70.5% from the prior year).

However, underneath the surface, all isn’t as well as it should be: the company's entire net income in 2020 was $721 million, which was boosted by sales of regulatory credits earning it over $1.5 billion (a 3X rise from the previous year).

Between 2015 and 2020, Tesla’s debt has grown from around $3 billion to $10.5 billion in 2020. Of this, $2.4 billion in bonds mature between 2021 and 2023 and a credit agreement of $1.8 billion matures between 2020 and 2023, totaling up to $4.2 billion in debt payments for this period. Tesla’s liquidity remains a problem – with over $700 million in interest expense reported for 2020, up 9% from the previous year.

In addition, Tesla’s contractual obligations – mandatory purchase obligations with regard to raw materials, components and services from suppliers and third parties – have been reported to be more than $18 billion from 2020 till 2025.

To combat the issue of interest expenses, Tesla CEO Elon Musk announced on December 8, 2020 that the company would raise $5 billion to retire debt and build up its cash reserves. This was accomplished by a $5 billion stock sale in a single day. But on the matter of contractual obligations, it will likely enter a prolonged standoff with its suppliers if it attempts to address this.

As 2020 ended, Tesla also announced its plans to move production from California to Texas. In addition to the plant under construction in Germany as well as plans for a plant in India, the increased cash outflow to accomplish these objectives is expected to impact the net income situation in 2021 as well.

Perhaps to stave off these points of financial uncertainty, Tesla invested $1.5 billion into Bitcoin (BTC) sometime in January 2021. Daniel Ives – an analyst at Wedbush Securities – reported that the company has earned more from the cryptocurrency’s appreciation by February (estimated at a whopping $1 billion in profit) than from sales of cars through all of 2020.

Short-sellers had a bruising start of the year as short positions in Tesla bled billions of dollars in the wake of the company’s continuing surge in stock price. However, Dr. Michael Burry, the investor made famous in the book and film, “The Big Short,” reiterated his strong belief in the company stock falling. In a now-deleted tweet on January 7, 2021 he said:

“Well, my last Big Short got bigger and bigger and BIGGER too. Enjoy it while it lasts.”

He went on to address Musk:

“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”

Given these factors and despite Tesla’s BTC investment, the company’s adjusted earnings per share reached $0.80 – a little below the $1.01 expected by analysts. Tesla also faces increasing competition as other automakers like Ford and Volkswagen ramp up their plans in the EV space. After the announcement of the company’s fourth-quarter earnings on January 28, TSLA dropped as much as 8%, wiping out around $66 billion off its market value. After a brief recovery following multiple optimistic forecasts for Tesla’s future growth, fears of production and sales delays in China, along with concerns that the stock had become a speculative bubble began to pile up.

If an investor had purchased an inverse (short) -1x Tesla ETP ("Inverse TSLA") – which is a one-click solution similar to shorting Tesla stock – on the morning of February 8 (which is when the aforementioned concerns bubbled over) and held it till the 19th, the performance of the 1-x Tesla ETP versus the underlying TSLA would have yielded a sharp benefit:While a Tesla investor would have lost nearly 10% over these nine trading days while the -1x Tesla ETP would have made over 8%. The S&P 500 index (SPX) – of which TSLA has been a constituent of since December 20, 2020 – barely moved.

This highlights the value of shorting. When done right, it can bring valuable hedging cover to the long-term investor and tangible benefits to the speculator. Investing into a -1x Tesla ETP can provide a cost-effective means of entering into a short for both kinds of investors, with the added advantage that investing in ETPs neither impacts nor even requires a margin account. Based on the weekly volumes report from the London Stock Exchange, shrewd investors seem to be already savvy to the benefits peculiar to having a short view on Tesla. Interestingly, Tesla isn't the only target of this increase: many other -1x ETPs have experienced increased volumes as well.

We had covered the benefits of investing into 3x and 2x Tesla ETPs in a prior article and had made a short argument in favour of investing into some other -1x ETPs in another article. Be it bulls or bears, ETPs help you stay covered.