In 2014/2015/2016, Tesla has constantly been our biggest positive contributor for the short book as we stuck to a very flexible approach to trading it (switching on and off between moments of exuberant expectations and sobering reality checks). At the end of 2016 we resisted the temptation to cover our short position in spite of technicals showing that the stock was oversold. It turned out to be a mistake. Our reasoning was that Elon Musk had run out of outrageously optimistic claims to make in order to inflate the share price and the company was facing some serious reality checks (deliveries for the 4th quarter, equity raise and delays in the model 3).

We were right on all counts except the only one which matters, the share price. No more surrealistic claims were made about Tesla, as the company missed its delivery target for 2016. It had to raise new equity in spite of claims of the contrary (Musk said in September “our current financial plan does not require any capital raise for Model 3 at all”), and it appeared that a near production model 3 would not be ready before March throwing doubts on the goal to move to mass production by July. We had not even foreseen the fact that the CFO would resign after less than 18 months in the job, something which usually rings alarm bells at “normal” companies.

However, Tesla is a not a “normal” stock, it is not even a “normal” bubble stock, it is an armour-plated bubble the sort I have never seen in my life. It is a new religion because any discussion with one of Musk’s zealots quickly resembled any discussion I had in the past with hard core religious believers. When you mention the unbroken stream of missed targets (the 2 year delay for the model X, the never met deliveries objectives, etc.), they reply that Elon Musk sets impossible targets in order to get the very best from his employees. So, missing targets has become a management tool! When you mention the constant cash calls in spite of earlier claims that there would be no need for further cash injections, they tell you it is justified by the fact that the dream just got bigger.

One may venture the idea that the size of the challenge faced by Tesla may require a full time commitment from its CEO and notice right away that Elon Musk might be a somewhat “distracted” CEO, torn between by his many other activities (SpaceX, White House advisory council, Hyper Loop, the “boring” company, pursuing Amber Heard) and “ground breaking” musings (solving Australia’s energy problem, wondering whether we live in a Matrix, achieving symbiosis between machines and humanity, etc.).

The believers will reply that these are all signs of his genius. Is it cynicism of the worst kind or religious fervour which inspires an analyst at a well-established Wall Street investment bank to write such non sense as “The sooner investors view Tesla as a transportation/infrastructure company rather than as just a car company, the more we believe the industry events to come over the next 12 to 18 months will make sense. The addressable markets within Tesla’s ecosystem could potentially include a $10 trillion light vehicle mobility market, a $1 trillion logistics market, a $2 to $3 trillion energy market and a potential multi-trillion market captured in the 600bn hours of consumer time spent in cars in the form of content delivery and data monetization.”? At one point in time, I stopped trying to count the trillions.

What I see is a car OEM, now laden with a solar energy service company which it has to rescue from looming bankruptcy, and a 50% stake in a factory producing batteries (with the partner, Panasonic, probably owning most of the IP), which lives off on the generosity of equity investors, the state of Nevada (up to $1.3bn tax breaks over 20 years), the state of New York ($750m for a solar panel factory in Buffalo), the Treasury Department (up to$500m in direct grants for the cost of installing solar panels), American tax payers (funding the $7,500 rebate any buyer of a Tesla car pockets, worth about $340m last year), and the state of California (generously adding $2,500 on top of the federally funded $7,500 rebate).

How long can this masquerade continue? Some mention Amazon as the proof that it may last and last and last, but the situation is different. Amazon did not have to raise equity to finance its relentless growth (sales multiplied by 45x in the last 15 years and still growing at 27% last year). All its growth was self-financed. On the contrary, Elon Musk has had to come up with his cap in hand to finance his dreams every single year since IPO in 2010, with the sole exception of 2014. He has raised $4.5bn in equity so far and close to the same amount in debt financing, and it is not over because there is no end in sight for the cash burn. In fact, he acknowledged in July last year that his “master plan” would end up costing tens of billion dollars.

So, the event which will pierce that armour around this bubble will be Musk’s inability to tap further the market one day. We need to find what will be the catalyst for this event. Until we find it, we will revert to our more flexible approach. Our job is to make money out of bubbles, not to make a statement about them.

Lionel Rayon

Lionel joined Schroders as part of the acquisition of Cazenove Capital in the summer of 2013, having been at Cazenove since 2005. He is a senior member of the pan-European equity team and manager of the Schroder ISF* European Alpha Absolute Return (circa $1 Billion AuM). He is also responsible for developing and maintaining a fundamental and valuation screen of European stocks. The screen forms the basis for generating ideas for potential further detailed investigation by the European team within the framework of their disciplined Business Cycle Approach. Lionel joined from Citigroup where he was a Director in the European Tech Research Team. Prior to Citigroup, Lionel had been with Schroders Securities, as a French specialist, Nomura Research Institute, as a metals & mining specialist, Enskilda and Chevreux de Virieu. Lionel graduated from Indiana University (MBA) and Institut d'Etudes Politiques de Paris (BSc economics & finance). He has 20 years of equity research experience.

Website: www.schroders.com


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