Teslas price is just too high. I think they will be very successful and become a big, dominant car maker.
But their price only makes sense if they end up being the only car maker left.
That's not realistic. Building an electric car is not that hard, especially if Tesla already did all the hard lifting for you.
For a while I was thinking that the battery play - becoming the number 1 battery supplier - will justify the price, but what I see right now looks like there is many players, old and new, moving in.
I won't short them tough, in the end I'm just a dog on the internet and have no clue how stonks work.
The statement "Tesla market value is the same as everybody else put together" means either Tesla is expensive or everybody else is cheap or the statement is inaccurate. It's a little bit of all three.
All other car companies are primarily debt financed rather than equity financed. Ford's market cap is $45B, but because it has $120B in debt which means it is worth $120B to it's bondholders and $45B to stockholders for a total enterprise value of $160B.
So Tesla isn't worth as much as all of the companies put together, it's worth about as much as 2 or 3 of the big ones. Which is still a lot.
But all the other car companies are facing an existential threat. Climate change and the EV transition are going to be tough. That has to be depressing their valuations some.
Tesla also has a really good profit margin. If they can keep that up, it goes a long way to justifying their prices. Pretty big if, that one -- the general assumption is that it will go down as they go downmarket to chase volume. Vertical integration might let them keep it up, though. Think of it like Apple -- 20% market share but >80% of the profit.
What I'm saying is that if Toyota or Volkswagen had no debt, a Tesla level profit margin and no overhanging challenge like the transition to EV, they'd have a market cap similar to Tesla's.
That still doesn't justify Tesla's market cap, but it makes it seem less insane.
>Ford's market cap is $45B, but because it has $120B in debt which means it is worth $120B to it's bondholders and $45B to stockholders for a total enterprise value of $160B.
I believe that's a bit misleading because it includes Ford's lending arm. They borrow money and lend it out at higher rates. So lots of Ford debt is lent back out to consumers at profit.
Wouldn't Ford then have assets, to cancel out of the debt?
I imagine that "120B in debt" means net debt, but I'm not sure.
[follow-up] yes, that's $120B net debt. They have a total $160B of debt, and ~$23B of that is from the automotive side of the business, not the financing side.
They do, but the GP was talking about the enterprise value. Kind of like taking the value of your home and subtracting the mortgage to get your equity. They're doing the reverse and adding equity + Deb to get the total value of the enterprise.
That works if the debt is for things like building factories or designing cars. But when's it's borrowed and then lent straight out it doesn't make sense.
If I borrow $300,000 at 2% interest and lend it to you at 5% interest, I have an asset based on my loan to you and a liability based on my debt to whoever loaned me the same amount.
They don't net out -- if you default, my asset will disappear without taking the liability with it. But it might be strange to say that I'm worth $300,000 based on my debt, when the whole concept of that debt is that it's theoretically guaranteed by, and related to, that asset. This combined situation does not suggest that I'm personally worth $300,000; I'm earning the difference in interest, and my debt to my creditor is based mostly off of your net worth, not my net worth.
Yes, debt is a good thing for Ford which is why its market cap alone is not a good indicator of its value in this case. OPs entire point is that when you factor in the EV instead of the MC, Tesla still comes out looking good but within reason.
- Tesla is achieving vertical integration to a degree no other mainstream auto OEM has achieved. The only other example of vertical integration to the extreme that I can think of is Koeneigsegg, and they are _very_ niche. This only helps Tesla make cheaper cars faster while collecting more margin per car.
- Tesla's FSD marketing is highly contentious, but they are the only auto manufacturer that is building (designing) their own SoCs explicitly for this. I wouldn't be surprised if they are outspending other auto OEMs on autonomous driving R&D by several degrees of magnitude.
- Tesla still has a major, major lead in EV battery tech which will only be cemented if they can get 4680 into revenue production. They also own the largest and (arguably) most reliable charging network in the world, which is growing at a faster rate than Electrify America, the second biggest competitor.
I think that Tesla is overpriced long term in a world where 91% of American cars are EVs and 48% of them are self-driving, but I think they are correctly priced for _right now_
> Tesla is achieving vertical integration to a degree no other mainstream auto OEM has achieved
This is crucial. It’s also why Tesla vs automakers reminds me of Apple iPhone vs existing cell phones. Sure making an electric car is “not that hard,” but because the carmakers didn’t take Tesla seriously for 10+ years, they now have a lot of catching up to do.
Outsourced using in-house designs, and, in Tesla's case, in-house assembly lines and factories.
Even the SPEAKERS inside of the Model 3 and Y are designed by Tesla (and manufactured by a vendor).
That's the big difference. It's also the reason why legacy manufacturers will struggle to effectively respond to Tesla. It takes a LOT of money and egos to upend generations of culture (and accept hundreds of millions in losses in the process)
> Even the SPEAKERS inside of the Model 3 and Y are designed by Tesla
In this particular case, is this really a good thing? Porsche's high end option for example is getting the speakers, amplifiers, tuned filters etc. from Burmester. Since Burmester specializes on this kind of thing, and the sound system (not the head unit and interface) are pretty much entirely distinct from the rest of the car, except that it has to be tuned to the environment it will exist in, that intuitively feels better conducive to focus areas and quality all around.
While I’ve no doubt the speakers in your Porsche example sound great, the German car industry LOVES to upsell a customer to a speaker with a designer label on it - every single brand in the VW group does it, BMW, Mercedes…
I think the German manufacturers just understand their customers vanity, sadly, where being seen to have the brand matters. The label is practically more important than the sound beyond a certain point.
In this case, the Burmester system sounds really great. I'm saying that as someone who has no such thing, so I'm less biased to like it. The example came to my mind because when I heard it, I was amazed that this was in a sports car.
But you may have a point anyway: The Bose system in the same car (a vastly more popular option because it is much, much cheaper) sounds worse than the cheap sound system in my old Ford.
Every auto manufacturer does this. Include a "Bose", "Harmon Kardon", or "B&O" sound system as part of a multi-thousand dollar premium package. Speakers are still the same paper cones as the trash-tier sound system; only difference is in some amp tuning, a sub, and a few tweeters. No surprise: the resale value of these systems is pennies by comparison.
For my particular example, I can at least say that the Burmester tweeters seem significantly better over the Bose, being solid (and heavy) ribbon tweeters, and not light cone tweeters.
Naïvely, I would think that having audio engineers in-house from companies like Harmon and Burmester that specialize in car audio but specifically to Tesla's product line would produce better, cheaper results than paying those companies to white-label audio systems.
No chance with that comparison. Per unit economics are different, marginal utility is different. Total cost of ownership is different. Pandemic has wreaked havoc for automakers and... for WFH Tesla owners made the 1k monthly car payment look unnecessary while most iPhone users upgraded phones.
> Tesla is achieving vertical integration to a degree no other mainstream auto OEM has achieved.
Tesla has made a lot of claims - volumetric efficiency, worrying about air resistance, when Musk toured the Toyota factory there was talk of them moving at granny pace. After the worlds most dramatic production ramp they still have yet to reach the capacity at Freemont of their predecessors (GM/Toyota).
Vertical integration represents the biggest issues with Tesla, a lack of focus. During the ramp of their mass production car, they went and bought Musk's cousin's company for a product that didn't even actually get released until basically this year. I don't see how that is a competitive advantage.
> Tesla is achieving vertical integration to a degree no other mainstream auto OEM has achieved.
That's because other OEM have worked hard NOT to be vertically integrated. There are benefits to splitting the value chain and letting each supplier concentrate on what they are best at, and get economies of scale from selling to multiple clients.
It seems to me that Tesla lack of focus is actually one of their biggest problem. You can't the best at making cars, batteries, solar panels, etc. all at the same time.
If you're looking for a vertically integrated electric car maker with an impressive position in batteries and semiconductors, I suggest you look into BYD.
> Climate change and the EV transition are going to be tough. That has to be depressing their valuations some.
Does it have to be? I can imagine that going from 100 years[1] of internal combustion engines to an entirely different type of drive train is going to be jarring, to say the least. But neither are EV completely new at this point, nor is a car just its drive train.
Surely other comparable transitions have been successful? Any older computer corporation has more or less reinvented itself a few times. More topically, airplane manufactures must have gone from piston engines to vastly different jet engines at some point[2].
[1] BMW for example exists since 1916.
[2] Apparently Boeing was originally founded in 1916, too.
> But neither are EV completely new at this point, nor is a car just its drive train.
Exactly this. The EV drivetrain is also simpler than an ICE because a transmission is not needed[1]. I think the hardest part about vehicle manufacturing, which is the issue Tesla seems to run into repeatedly, is dependable mass production.
The major auto conglomerates have a lot of experience with cranking out massive volumes of quality vehicles. I don't think that re-tooling their production lines is going to be a problem. The primary issue with switching to EVs, which Tesla should capitalize on, will continue to be energy storage. Sourcing large quantities of batteries is tricky. Tesla had the right idea to just vertically integrate cell production and likely has a lot to gain by being the premier battery producer for the industry.
As an aside, hopefully the switch to EVs will help fund research for the next breakthrough in battery tech.
[1]: Application-dependent but most 2-axle consumer electric vehicles should not need a transmission
In light of the Panasonic partnership with its large involvement in the gigafactory, I don't understand why Tesla is supposed to be considered vertically integrated in batteries. Nothing stops Panasonic from collaborating with a car maker that churns out 10m+ cars per year
I agree with the sentiment that comparing Tesla's market cap with traditional car companies is inaccurate.
For certain companies, market capitalization is a good proxy for enterprise value, but as this poster is mentioning, that's not always the case for companies with debt.
enterprise_value = market_cap + debt - cash
Looking at the market caps of long-standing US car manufacturers is doubly problematic cause they have significant pension obligations. They're producing cars to build shareholder value and pay for retirements.
Comparing market capitalizations of companies that have completely different debt / pension obligations is misleading.
At the same time we have to consider that debt is both exceptionally cheap and advantageous in an inflationary environment. Having to serve debt at 2% is much, much easier than doing so at 7%+
I'm having deep trouble trying to appreciate this argument, apple has deep network effects it has build an ecosystem, a platform. If I want to use iOS I have to buy Apple hardware, if I want to offer a mobile app I have to go through the app store. Nowhere does Tesla exhibit similiar properties, instead it competes in the hyper-competitive, high capex and low margin car business. Trying to beat Toyota at scale manufacturing is a very tall order
If you look at their where their 25% profit margins come from then no, they aren't a hardware company. If Apple tried to make a car tomorrow they would not have 25% margins on it.
From a market valuation standpoint, this is also why Apple valuation is 44 times higher than Ford's.
I looked into it[1], their net profit margins were 32% last quarter. 36% gross margins on hardware products (iPhone, Mac, etc) and 70% gross margins on services (AppleCare, Cloud Services, etc.). However services only comprise 19% of their sales, the other 81% of their sales are from hardware products (mostly iPhones). Their service sales seem to all stem from them making the hardware. For example the AppStore walled garden is protected by the hardware, AppleCare services their hardware, and Cloud services are integrated into their devices, etc. It may be possible in the future for apple to get high margin "service" sales from an Apple Car App Store, buying games and movies for your self driving car, for example. Regardless I'd definitely consider Apple a hardware company.
iPhones are not a commodity product. At the moment Teslas are. How will Tesla convince consumers that their car, with a high profit margin, is worth it over a mature EV vehicle from Ford, BMW, etc.
As of right now, the most mature EVs are Teslas. They've established themselves as the gold standard of EVs. If anything, their main hurdle is still convincing consumers to buy EVs instead of ICE cars.
* Convincing the public that Tesla can be trusted for long term repair costs/reliability
Right now Tesla is squarely in the luxury vehicle market, competing against Lexus/BMW/Mercedes, rather than against Mazda/Honda/Kia, and it's a new automaker, so we don't have good long term reliability or serviceability data, nor do we have good info on how long the batteries will last, or what costs someone buying a 10 year old model Y will face.
These questions will resolve themselves with time, but whether they will all resolve in Tesla's favor is another matter.
The Model 3 SR+ starts at $39k. For a while, the Model 3 SR was available by special order for only $35K [1] but it did not include autopilot (Autosteer+TACC) and other things.
For $39K it's actually a tremendous value. If you plan on keeping it for more than 5 years. It will actually beat a comparable Accord/Camry Hybrid in terms of TCO.
"Calculating insurance, maintenance, repairs, taxes, fees, financing, depreciation and cost of electricity, we get the true cost of ownership for the Tesla Model 3 which is $25,209."
2020 Tesla Model 3 SR Plus: $25,209
2020 Toyota Camry Hybrid : $36,571
As for reliability. There are already plenty of really high mileage Teslas out in the wild. Like this guy who put 800,000+ miles on his 2014 Model S: https://twitter.com/gem8mingen
When big companies change the subject from the cost of their products to TCO, that's when you check your wallet. Particularly when you are calculating TCO by assuming the car is under warranty and trying to sell that to a used car buyer who has no warranty and is forced to service their car at predatory dealerships and may be facing a 20K battery replacement cost. TCO needs to be calculated over the entire life of the vehicle, otherwise your plan is to sell the car to a sucker at the end of your ownership period, which may work for a short period of time, but not over the long term.
Rear drive standard range model 3 starts at 40K. There is simply no universe in which this is either affordable or a bargain. This is entry-level luxury car pricing. If you are buying an out of warranty used Tesla for 20K, say 5 years old, then your TCO is going to be far higher than if you buy a 5 year old out of warranty Camry or Toyota. It is also foolish to include temporary government subsidies when determining the long term viability of a company. Those will all go away shortly at which point your TCO will also go up, and used car buyers do not benefit from these subsidies.
And the Camry is the more expensive sedan, with the cheaper Corolla outselling it regularly.
That's kindof the point. If you want Toyota style volumes, be prepared to have Toyota-style reliability, repair costs, parts eco-system, independent mechanics, and selling prices.
The weighted average retail price for new Toyota cars sold is 34K, and 2/3 of cars purchased each year are used cars. The weighted average selling prices of Teslas is ~60K, nearly double the price of Toyotas. And remember that Toyota is a premium brand due to their legendary reliability. Let me know the lifetime service costs of a Tesla and then we can compare that to the Toyota. Include battery replacement costs in that figure and get back me to me with a real TCO.
For Tesla, there are real question marks about out of warranty cost of ownership and battery replacement costs for purchasing used Teslas. For example, I've never paid more than 13K for a car, always have it serviced at independent mechanics I have a relationship with, and I have always kept my car for at least 7 years, with relatively cheap maintenace cost -- the biggest repair ticket item I ever needed to pay was a clutch replacement. So I am not willing to eat 5-7K in depreciation+maintenance per annum that Tesla buyers will pay. I've only ever suffered at most 1.5K per annum in depreciation+maintenance over the life of cars I've purchased. So don't talk to me about the great deal of paying 40K for a tesla that will lose 20K in depreciation over 5 years. I don't care how much cheaper electricity is than fuel, there is no universe in which this is a cost effective form of car ownership for the majority of the public (2/3 of car sales are used car sales).
I buy reliable used cars that are 5-7 years old that are easy to service. So do other cost-conscious purchasers. For this demographic, there are too many question marks for me to dip into the EV market now, but wait 10-20 years for more reliability data to come out and to see if a cost-competitive third party aftermarket springs up for Teslas that has replacement parts and service costs comparable to what you can get with a good local mechanic working on Toyotas or Hondas, as well as battery replacement costs that are less than the price of the car when the battery dies -- unless the plan is to sell disposable cars, at which point the value proposition is even worse for cost-sensitive purchasers, and Tesla will have a hard time competing if their intention is to sell disposable cars for a higher price than cars that can be maintained for 30 years.
Even if you round up $39K to 40K. It's still a far cry from your initial $50k assumption. $10K is not even close to being a rounding error and makes it seem like you're reaching.
You also made quite a bit of other assumptions here. You should actually fact check some of your claims. You can do the math yourself. Numbers don't lie.
If you can somehow show that the articles and data is wrong. I genuinely would love to see how. Because I put a high value on facts/data vs opinion and that will be news to me.
Independent of whether you are right or wrong, your tone makes you look like an asshole. Please moderate it. Your "sealioning" debate strategy does not help you either.
(The other posted also talked about ASP of Toyotas, so his comparison was fair btw.)
Fair enough. Especially the third one. Especially outside US.
I've been joking to my wife for years now that we should get a Tesla eventually. Over that time, I've seen her going from "what's up with these EVs anyway?", through "that's a really expensive car", to "sure, but if anything breaks, IIRC the closest shop that can repair it is in Norway".
Yeah, I think Tesla is just shooting themselves in the foot here. They should be sponsoring a healthy third party aftermarket, they should be adding easy to use ODB ports, they should be publishing service bulletins. And if indeed Munro and other EV enthusiasts are right that maintenance costs will be 90% lower, Tesla should be offering 20 year warranties on their car to give potential buyers, especially used car buyers, ease of mind when purchasing their cars. It's a new tech, there are lots of question marks about long term reliability, so if Tesla is so confident that these are non-issues, they should step in and insure car buyers from these risks. If indeed these cars are incredibly cheap to maintain, it wont cost Tesla much and will open a floodgate of new buyers.
> They should be adding easy to use ODB ports, they should be publishing service bulletins
Both of these have been happening for years now. You can even look up parts/diagrams and order directly from Tesla if you provide your VIN here: http://epc.tesla.com/
Maybe these are not obvious to non-owners. But it's silly to assume things where you have incomplete/false information.
You can talk to actual owners here: https://teslamotorsclub.com/tmc/. I lurked around and asked questions to owners for years there. When I was researching if owning a Tesla is even viable. I own 2 now and never looked back.
Also on your reply above. There are already 10 year old Model S's out there.
My old neighbor just sold his Toyota 4Runner and got a 2012 Model S with 75K miles for $25K that still runs like new. He has it for almost two years now with ZERO maintenance/issues and spends $15-20 a month on electricity.
Tesla is not in the luxury vehicle market. They have carved out their own segment with some overlap. They have pulled in some of the Kia and BMW market for those who put a price on technology, EV, etc
That's irrelevant. Being a high quality or popular product doesn't stop it being a commodity.
Apple worked hard to make an iPhone a different product segment to a smart phone the App Store, iMessage and an ecosystem of Apple-compatible services and products. As a result of you want to buy an iPhone you need to pay the premium Apple is asking.
Tesla have the supercharger network and brand name recognition. Neither of them would allow them to completely own the EV market.
When they provide an interior that isn't inferior to ICE cars (e.g. physical buttons and readings/dials in front of the driver) - and don't lose half their battery life for me in the winter heating the vehicle - then I'll probably buy an EV.
> I won't short them tough, in the end I'm just a dog on the internet and have no clue how stonks work.
To be clear, Michael Burry didn't short Tesla, he bought put options, which gives him the right but not the obligation to sell Tesla stock for a certain price, on a certain date.
If the bet works against him, his options expire worthless. This puts an upper limit on his losses.
If you have an actual short position, your potential losses are unlimited.
Actually we have no idea if he is short TSLA. The fact that he has purchased TSLA put options is from the SEC Form 13F which he's required to file quarterly.
Short positions (for some reason) are not on the 13F.
So he could be long TSLA and have purchased put options as a hedge or any number of other strategies.
I'm not sure that's necessarily meaningful. Sure, you pay for optionality in a put as opposed to a short, but it may be easier and cheaper to buy a put than finance a short if you believe the stock will go down. The downside isn't unlimited if you short, since I don't think you'd be on the hook if you hit a margin call, your collateral would simply be seized and your position would be exited.
I'm sure there's other intricacies in short vs buy a put, but I don't think you can infer too much from the choice without knowing a lot more. I think all you could say is that he's bearish on the stock in the short term.
I could be wrong though so I would love to hear other interpretations or whether there's some liability apart from your margin in a naked short.
It's a very meaningful distinction. If you have a put option, the stock can go to the moon and back multiple times, and you can still end up in the money on the strike date. If you have a short position, you're going to get margin called on the way to the moon and it's "game over".
With a put option, you pay premium in the form of "theta decay" over time. If Tesla stays flat, you lose your entire premium, and on a stock like TSLA with high implied volatility, that can be a very expensive proposition.
Similarly, with a short position, you'll be paying a borrow fee which will vary over time based on short interest.
Fascinating subject. I also just want to mention why it makes sense that people SELL put options, in addition to buying them.
If you sell a put option, then you have the obligation to sell in the future at the fixed price, regardless of the market price at the time. However, many of these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options. So if the stock goes above the strike price, they have the option of selling the shares the already own. Thus, the seller is not on the hook for infinite losses. They merely trade the potential for unlimited gains in return for a fee.
I've always thought it would be fun to get into options by regular, automated, selling of covered put options. You get paid by speculators for underwriting their speculating. But... options pricing models are like real academic. It's like a real job.
When you sell a put, your obligation is to pay the strike to buy someone else's shares.
For instance, AMD is trading at $77. Let's say I'm long-term bullish on AMD, but don't want to pay more than $70 for it. I can sell $70 puts every week, collect the premium up front, and then if AMD closes below $70 on the expiration date of my short put, I'm obligated to pay $70 for the shares, even if they're trading much lower. I win because I get to collect the premium no matter what, and if I get assigned, I bought at a discount to the market price when I sold the puts.
A covered call gives you the obligation to sell your shares to someone else if the option expires in the money. This is a great way to exit a position, for the same reason. You can sell calls repeatedly at the lowest price you'd accept for your shares, and if it moves down, you've hedged. If it moves up, and you get assigned, you sold for above market price as compared to when you sold the call.
> these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options
A covered call is where you sell options backed by long shares. A covered put is backed by short shares. A common way of selling puts without shorting the underlying stock is just having enough cash on hand to buy the underlying asset if the option is exercised.
And yeah, some small investors do claim to make decent income primarily writing options. The basic idea is that if you can eke out like 0.5% a week on average, you can get around 25% annual returns. I've been looking into trying to automate some basic strategies, but it's rather daunting just getting started in automated trading. Figuring out how to just get the data you need for implementing a strategy is a pretty big hurdle, for instance.
Surely your liability is to the shares you borrowed, not the fraction your account has to meet margin requirements? If not, why would a broker ever let you short on a margin account under the same rules as other margin?
You can of course. There's a risk the the stock will move quickly through your limit and you stop out somewhere beyond it. This is unbounded in a sense but not generally problematic on a highly traded stock like Tesla.
That's basically how a margin call works. If your position loses too much money relative to the other components of your portfolio, your broker forcibly closes your position to prevent further losses.
the limit is a trigger for sale, not a guaranteed price. for small volumes (retail) transactions, it usually doesnt matter, but if you are talking hundreds of millions of dollars worth of shares, your activity aloe will move the price.
No, and this distinction is critical to understanding the risk that short sellers take.
To use a slightly anomalous stock which hasn't split as an easy example, if you had shorted $BRK in 1980 when the price was $300, the potential upside was just 100%: In your best outcome, they go bankrupt and the most you earn is $300. Unfortunately for you, Berkshire Hathaway shares are now worth $430,000, so your $300 or 100% upside turned out to be a rounding error against the approximately -150000% loss.
Edit: The reverse is technically symmetrical, but the consequences make it work out differently for the markets and society. Yes, if you'd bought BRK in 1980 you'd have had a liability of $300 (your cash input could be worthless if they went bankrupt) and a potential upside of hundreds of thousands if it went to the moon.
The difference is that if you held the stock and it goes bankrupt, you're only liable for the amount that you put in. Worst case, you bet the farm and you're going to be washing dishes to put food on the table, but it's your loss to lose and your gain to win. If instead you bet the farm in a short position, you never had and will never have thousands of farms to bet in the first place; you're going to declare bankruptcy and someone else is going to have to pay for the bad bet you made. That effectively pushes the losses back on society but privatizes the gains.
OK, but the person you were responding to was asking if this also meant that the upside was unlimited - so in your example the answer is 'yes', if you bought in at $300 the stock price can just keep going up without bound. Can you clarify why these are different?
If you win $300, good for you, if you win $430,000, that's even better for you, but the market doesn't really care which way that goes.
However, if you lose $300 that you brought to the table, that's your problem, too bad for you. If you lose $430,000 when you only brought $300 to the table, that's beyond being just your problem, that's the system's problem.
A system which allows this situation to happen is fundamentally flawed, it's vulnerable to exploitation and collapse if this kind of behavior allowed to go on unchecked.
Hence there are checks and defense mechanisms in place, and a risky short position (meaning position with loss over the credit given to the position holder) will be closed by the bank/broker.
Those guys in finance and regulations have been here before we were born, they managed to cover most basic stuff by now.
Does that ever actually happen? I thought that a margin call would come far before it reached that point, limiting the damage to any of the involved parties.
I get that, but it sounds like you are answering the question you wanted to instead of "what does unlimited mean if that loss is an unlimited downside but holding a stock is not called unlimited upside".
If you need to cover your short and there are no shares being sold you effectively must keep offering higher and higher prices until someone will sell you a share as you are legally obligated to buy a share[1]. To end the unlimited downside (of raising the price you'll pay by more and more) you need to have enough sell orders on the books to cover your short or have raised the price enough for someone to sell. During the time you are trying to buy your loss is increasing (as you raise the price to get a seller) and is unbounded.
If you have a stock you have to sell and there are no offers to buy on the books you can't offer to sell then keep raising the price, instead you would need to keep lowering the price.
The price is either limited by what's on the books, or you need to wait an indeterminate amount of time for some one to buy at the price you are selling. During this time you are trying to sell your profit is decreasing (as you lower the price to get a buyer) and bounded by $0 (for a limited liability company).
So while it's true that if you hold a stock indefinitely the value you could get is unlimited with a short the value you could lose could be unlimited over a much shorter time frame.
[1] Whether you actually need to cover your shorts may be a matter of some debate if you look at the wild rumors around GME
As a sister to my comment I'll also add you can effectively (though not legally) short more stock than you can buy.
This is because to short you pay for a stock at the current market price with the promise to sell it back at the same price to the lender at a future date. If you then immediately sell the stock you can use that money to immediately pay to borrow another stock.
This means with the cash it takes to buy 1 share you can short as many shares as someone will lend which can multiply your loss to more than you have.
All three technologies are really key parts of the future, and controlling that aspect of the suburban home energy profile have absolutely huge synergies.
As we get to higher penetration of renewables, our grid will change from the current model of supplying whatever power is demanded, to a far more two way mode where excess supply will drive time-shifted demand.
Right now the only monetization strategy on the grid for solar/storage providers are 1) net-metered solar, and 2) backup electricity for outages. This will change.
The most expensive component of an EV is the battery, and it's likely we will have as much grid-attached non-EV storage as we have EV storage.
IMHO the current price is unhinged from any analysis, and fully in the tulip bulb stage of share pricing. But I think that Tesla is better positioned to take advantage of three core technologies of our energy future, three techs that must be tightly coupled, and no other player is even really thinking of that.
That may be true for car makers, but in the energy world, other than some battery storage projects, Tesla is really not a major player at all, and there is an endlessly long list of companies that are more meaningful for this market and better able to take advantage of the increased renewables rollout around the world.
When it comes to utility-scale grid storage, Tesla definitely gets the most press, but I would agree that there are serious competitors like AES and Vestra. I would be interested to hear some names from your endlessly long list, because I can't come up with many of them. For the home battery market, Tesla is definitely one of the leaders.
I think the primary reason Tesla has not shipped more batteries that are permanently attached to the grid, either in from or behind the meter, is that selling a car is a far higher margin destination for their batteries. So as long as Tesla car sales can suck up batteries, the battery factories are probably going to be using most of their time making batteries for cars.
I'm not one to typically paraphrase billionaires, or think they're too connected to reality... but something I heard Mark Cuban say the other day was kind of "oh, shit that's true" moment for me. It was something to the affect of (I can't find the clip at the moment), "Back in 2010 we never thought we'd see a company hit $1 trillion. We never thought Apple or Amazon (et. al) would be able to continue their growth year after year to even be those $2 trillion dollar companies..." All I could think was "oh shit, yeah, I never thought I'd see it either."
Ten years ago, Apple was worth $297 billion dollars, today it's worth $2.1 trillion dollars. I think Tesla stands a good a chance to be worth these seemingly absurd valuations. The market price isn't solely defined by the current value. With tech companies especially, it reflects expected value, and Tesla still has a lot of room to grow. I'd be more skeptical but EVs are eventually going to cost way less to make than typical ICE (internal combustion engine) cars, and per unit that savings translates into a lot of fucking profit. Not to mention the additional profit they're raking in thanks to the public's image of Tesla's and the experience generally being "magical" (even if gimmicky). Also, a "green crypto" if a Tesla branded play (I feel musk is bringing this soon) will cause a pretty gigantic boost to the company's bottom line.
For at least the next 2-5 years Tesla is gonna be pretty safe, and I'd guess that 2-5 will buy it like 3-5 more years just being the incumbent... I don't think Burry is going to be to happy on this one. Mark Spiegel has already fallen to the beast, and I suspect Burry is likely going to as well.
"Tech" companies here encompasses quite a broad list of markets. Just because Apple and Amazon managed to upend expectations doesn't mean that Tesla will. Most of these gigantic technology companies are software companies that have incredible profit margins and really hard to disrupt market positions. Apple is unique in that it manages to sell a premium product with premium pricing without it affecting overall demand with the best-in-class product differentiation that the Apple brand is known for.
Yes, Tesla's managed to do something somewhat similar, but will that continue to hold? Even as automobile competitors finally wake up and start competing on electric cars? Will they become the largest automaker in the world? Tough questions to answer.
FWIW, the context of that was him defending wallstreetbets putting money into gamestop. His argument was that for most investors stocks just represent a store of value and little else - not some bullshit "owning part of a company" or even "fundamentals".
Part of his argument was that even companies like Apple have gone way beyond any valuation anyone would have thought reasonable as little as 10 years ago.
> I'd be more skeptical but EVs are eventually going to cost way less to make than typical ICE (internal combustion engine) cars, and per unit that savings translates into a lot of fucking profit.
What's the basis for this? Battery tech evolution and ICE cars have no more (safe) optimizations to make to get costs down?
This is also predicated on the idea that every part of Tesla's operations are substantially better than existing automakers.
Do people really believe that Tesla is literally run 10x better than Toyota, Volkswagen, Daimler, BMW or Honda? I don't think so.
Then there's the nightmare of trying to appeal to two wildly different consumer groups.
At the low end: does Tesla have a meaningful reliability advantage versus Honda and Toyota? From what I have seen, it appears not. This matters less when you're dealing with premium buyers, but will not work with the mass market. Fans will put up with hassle (I own an AMG... I'm more than aware of the extra expense I am constantly paying for - and that's a trade-off I'm happy to make in return for a powerful v8).
Secondly from a clout point of view: why would anyone buy a Tesla over a comparatively priced Audi, Porsche, Mercedes or BMW. The people who talk about their Model 3 with a burning passion aren't trading in a 911, or an E Class or a Q7. They're excited to upgrade from a 2015 Camry. Massive expectation gap.
Plus, all of these companies are valued far more realistically. Tesla being worth more than every other automaker or whatever gives them very little room to breathe. If Tesla is ever valued as the hardware manufacturer with relatively low margins (when compared to say a tech stock like Facebook or Salesforce).. is the day that we will see an enormous valuation haircut.
I wonder if it's as simple as the market confusing all new technology companies with software companies, which have incredible distributional advantages and the ability to grow revenues from optimizations.
The company valuation of BMW and VW isn’t the problem- it’s a problem for Tesla. There aren’t enough nerds in the world to justify it’s insane stock price.
I won't speak to profit, but battery performance per dollar has been improving at a fast exponential clip for the past couple decades, which is one of the largest costs of an EV.
An EV drivetrain is also far, far simpler. Fewer parts, and less complexity in those parts. No clutch, gearbox, carburetor, differential, starter, pumps, exhaust…
A modern ICE car is an absolutely unbelievable engineering marvel, but unless battery progress unexpectedly stalls there's just no way they can keep up in price or reliability with EVs.
Amazon and Apple are WAY WAY WAY different companies than Tesla.
Apple has dominated high-end smartphones for over a decade. Amazon has dominated eCommerce for that time and longer.
Tesla dominates EV, which is a tiny portion of all auto sales. There is about to be huge competition in the EV space from legacy auto manufacturers and a car is not the same as a phone.
There are plenty of cars with a WAY better driving experience than a Toyota Camry but it's still the best selling sedan on the road. So really hard to believe Tesla can win by offering "premium" driving experience.
EVs will dominate the market at some point in the next 15-25 years or so.
Tesla is priced as if it's going to absolutely dominate the automotive market. And there's no reason to believe that's true.
Automotive is currently a super fragmented market with many players, why will that change in a couple decades when it has been true for the past century or so?
There will be at least 3-4 major players in NA just as there are now, maybe more.
The question imo is if time benefits the incumbents (due to monopoly / network consolidation) or if time benefits the disruptors (due to the commoditization of growth/scale, the shrinking of the distance between 0-$1B, and tech monopolies being based on 90s web tech which is stretched to breaking point). How will climate disruption fit into this, who benefits as the world starts to break faster and faster.
> EVs are eventually going to cost way less to make than typical ICE (internal combustion engine) cars, and per unit that savings translates into a lot of fucking profit
Not in a competitive market which is where Tesla may be in 10 or 15 years, especially if everyone commutes by robo-taxi.
When Berkshire Hathaway was still a textile company the operating manager excitedly told Warren Buffett about a new loom machine being developed which was far more efficient. Buffett's responded that if the report was true he would likely close the business, because he cost savings would flow to the customer and the long-term return on the new capital investment would be low.
The world needs enormous amounts of stationary storage to transition to zero carbon electrical generation, and nuclear ain’t happening. Tesla sells batteries in lots of products, some with better margins than others.
F150 Lightning being unveiled in a couple days is a good example of this. The F150 is the most popular vehicle in America & this has a good chance at being a pretty big success.
Not really comparable but Porsche sold approximately half as many cars last year as Tesla. Shows how small Tesla actually is (approx. 500.000 cars). Ferrari sold ~10.000.
Telsa's only significant achievement was to create a company structure that allowed it to pursue a loss making manufacturing startup to begin with. The big auto makers have golden handcuffs and can't risk that sort of paradigm shift to a new market. Now they know people will buy them they will easily retool towards electric. I think Tesla will either be crushed or end up a midsized player.
TSLA price may be justified in the future IFF they are not "just a car maker". I think with batteries, self-driving, something else?, they have a potential to be "more" than a "dominant car maker" but they are definitely not there yet. Will they ever be in such position? This is a bet some are willing to make. Personally, I invested in them near their IPO price right when Elon joined betting that they will become "the best EV maker". They achieved that. Will they achieve a much bigger bet of being "much more than a carmaker"? I am not yet comfortable making such bet. At least not at this cost.
> I think they will be very successful and become a big, dominant car maker.
I'm not sure really. They keep throwing the entire company at insanely poorly leveraged bets with unfulfilled promises. (Cybertruck is on track to be delivered at a longer timeframe than any car tesla has ever made, they haven't even built the factory or unveiled the final design, same for Semi and Roadster, the new Model S was supposed to be shipping in..uh.. March?) I think they are scaled too big to breathe and survive, eventually being bought in a post-Elon world by a Ford, GM, or possibly Google or Apple.
They bet the company on the OG roadster, S, and 3.
They don't need to now. The 3 and Y are quite successful and quite profitable.
The Truck, Semi, Roadster, Leaf Blower, and such are all distractions that aren't worth building until they've managed to establish much larger battery volumes and aren't selling every Y and 3 they make months before they make them.
What's their run rate? They've got a ton of cash and viable products (3 and Y) where there are people lined up to buy them before they're even made. And they've got the supercharger network which is an enormous differentiator against any other EV.
Their biggest threat is if there's some enormous unseen flaw in their battery design where they get swamped with battery warranty claims.
The share price is absurdly high, but it is similarly absurd to project the company going out of business.
>The 3 and Y are quite successful and quite profitable.
I'm not sure I would define the sales as successful. Tesla would still be in the red if it wasn't for bitcoins and emission certificates they sell to other manufacturers (and this income will be gone in a few years). VW has barely started switching to EVs (ID.3 launched in July 2020) and yet they sold half as many EVs in 2020 as Tesla did, so maybe in that light it is kinda successful but at the same time VW sold almost ten million passenger cars. I predict that Tesla will be run over as a car company in a few years but will maybe become successful in investments.
They already are betting the company on a bunch of things. Their cash on hand is almost entirely debt.
Additionally, they are merely meeting demand on Model 3 sales right now, don't forget that they spun down production rate on the 3/Y and are slowing China production as well. US charging networks are growing at a faster rate than Superchargers as well, so in roughly 2 years you are looking at a market where Electrify America is as big as the Supercharger network, the current NY to LA EV record is held by a Taycan on EA's network, not a Tesla.
The Model 3 is not very profitable at all either, sure it sells well (as it should, it's a great car being sold at almost a loss!) but a M3 without AP is not profitable. Still, to this day, they haven't made a penny on their business other than with selling credits but they are not even investing that heavily back into the business right now.
Finally, the Cybertruck was told to reservation holders to be shipping in 2021... which isn't happening.
What I find kinda funny is this: You call the truck a distraction..when it is the #1 best selling category in the US AND they have fast encroaching competition that owns the market. That's like calling the Rav4 a distraction for Toyota. The Ford F150 Lightning will likely outsell the cycbertruck in the US as Ford will have two years to scale and keep it in that scale by time the Cybertruck does actually launch. It has been Ford's #1 R&D goal for the last three years as it should be, it's their #1 selling vehicle. Ford sells two F150s in the US for every car Tesla makes globally and the margin is way more per unit.
I'm not saying they are going to go out of business today or this decade. I'm just saying that their differentiation will disappear, customer's will to deal with terrible timelines will evaporate when they can go the next door over and get it today, and once Elon is gone from TSLA (which will happen and should terrify shareholders; he clearly wants little to do with Tesla), the stock will fall like a rock and the debt leverage will fall with it finding Tesla way upside down on a LOT of money that they can't borrow more to cover and without the market and profit explosion the company is betting on.
Their debt [1] doesn't seem outrageous especially when they recently converted some of their over-inflated stock into more cash-on-hand. That article says they've got $19b in cash-ish assets, 11.7B in debt 2 of which is going to be coming due soon.
Regarding 3rd party fast-charging networks; look at https://abetterrouteplanner.com/ and a/b test a tesla vs non-tesla going from where you might want to be to where you might want to go.
For the most part it is practical to use a tesla as a normal car including long-distance trips, the same isn't nearly as true for other EVs. Plus, a modern tesla can use 3rd party charging networks.
As far as truck / semi / etc goes -- I suspect tesla simply doesn't have the battery capacity to make those new products and the existing product line.
Tesla's a battery manufacturing concern looking for the highest profit-margin products to wrap around batteries. As they've expanded battery capacity they've expanded from unreliable sports car to luxobarge / weird SUV to BMW 3 / Audi A4 competitor and now have expanded to include competitors to the Q5.
Lastly, when looking at the market cap of Tesla vs some other car company, keep in mind that tesla includes a global dealership network while other car manufacturing companies outsource the dealership side of the business to others. What's the global value of ford + all ford dealerships vs Tesla?
What makes you think that? I mean he sure has more fun with other stuff, and I don't follow him closely, but I didn't get the impression he hated the business.
This comment reminds me of a car auction i went to years ago: This 2 yr old car with around 250,000kms on it came up, likely used for long distance travel as this was in rural Australia. The car looked like a 2 year old car inside and out, it was completely normal except for the odometer reading. The auctioneer used the line "No one can read the odometer when you're driving on by". I wouldn't have bought it, but i liked the line.
While I won't dispute that Tesla's share price is high given where the company is at right now when valued as an auto business, there are a few things I think are worth mentioning and commenting on in your post.
> Building an electric car is not that hard, especially if Tesla already did all the hard lifting for you.
This couldn't be further from the truth. While making a prototype EV is relatively easy, yes. EV industry followers will note that the real challenge is scaling EV production, and specifically the batteries' production. You don't need to look further then to answer: 'Why don't all of these automakers have tonnes of EVs on their lots available today as we speak? Why are they all '2022 release' or even 'dozens of models in 2025'. Because all of the tier 1 and tier 2 li-ion battery supplies have already been allocated from now to several years out, and if you want 'EV model volume' scale batteries, you better be ready to fork over the capital or purchase commitment for a batttery cell production line that might not have had a shovel hitting the ground yet. And waiting a few years for assembled product.
> But their price only makes sense if they end up being the only car maker left.
Assuming both the gross margin profile and auto ownership model stay the same - sure. Tesla has proven to generate more gross margin per vehicle than other automakers as is, they have 'practically' infinite demand (stimulated by expanding geographies and targeted price reductions when demand sags). And this isn't accounting for GM expansion for vehicles that could be a part of a ride hailing network (autonomous or not).
I do believe, like other 'Tesla fans', that when factoring in their lead in scale and tech, unit cost advantage as well as how things look on a decade or two time horizon, I think it is quite likely that there will not be a better time to become a shareholder in the next 1-2 decades.
One way I look at it is by comparing it to Apple, a ~$2T market cap company in 2020 dollars. ARPU of an Apple customer compared to a Tesla customer is probably between 1/4-1/10 (how much iphone/mac/apple services does one buy versus transportation spend on an annual basis). If you project Tesla margins to look more like Apple's 10 years from now (yes, a big bet), even with similar market share breakdowns of iOS/Android today - it isn't a huge stretch to imagine with ~50-100M EVs on the roads by then - that you could have Tesla with a market cap between 10T and 20T in 2020 dollars. Particularly when factoring in their business segments beyond personal transport/light vehicles.
They are so far the only company making EVs to have crossed the 'valley of death'[See: crossing the chasm]. Startups and established automakers will need to spend billions in order to get EVs sold at scale that generate FCF per unit. It is a tall order.
(Not financial advice do your own research etc etc)
EDIT: Also note that Tesla has stated in an earnings call that they are looking at 50% CAGRs moving forward, and I do think that they could be undershooting this number a bit.
European car brands (combined) sold more EVs in January-March than Tesla. Also, Nissan was selling more EVs than Tesla for many years. It just doesn't seem that difficult to scale EV production.
The EU imposes a 10% tariff on imported cars. That makes EU built EVs more competitive within the EU.
Tesla is building that Berlin factory to decrease shipping costs and time and also to not have to pay the tariff.
Perhaps more interesting is that the more popular EVs in Europe are hatchbacks. Hatchbacks are more popular than sedans in many European countries. Tesla is missing a car to compete in that segment.
The current normal of competition between countries is to allow foreign car companies to build factories in their country. I bet that if a country's car industry faces an existential threat, the country will tilt the playing field further in that country's car companies favor.
I do not expect that Tesla will be allowed to wipe out other country's car industries. It may be allowed to become the preeminent EV maker (which it already is if you count by market cap). I think that Tesla will need to try to win in other areas: EVs for countries without strong car industries, energy storage, self driving cars, etc...
I don't follow this very closely, but hasn't Volkswagen already shown they're not that far behind, and aren't they already outselling Tesla in Europe? I've watched a lot of the ID4 reviews (since I'm in the US and we don't get the ID3), and the issues with the car seem very minor, and potentially fixable with OTA updates. If they end up selling a lot of them, that should take a lot of the wind out of Tesla's sails IMO.
I am hoping that VW and others can get to scale quickly. If priced correctly (not too high), I don’t see why VW won’t be able to sell every car they are able to make. The key thing when looking at these metrics are that it is primarily a supply defined market rather than a demand defined one. And, it is about offering a low enough price such that the market will buy it - while hopefully gaining some positive margin on each.
The outselling of Tesla I’m not going to take at face value yet until Tesla’s Berlin factory comes online. Note that Europe sales thus far have been dependent on imports and that it’s quite likely Tesla has been focused on delivering and collecting cash on NA/Asia sales and having the European customers wait a few quarters.
With ICE vehicles being 98% of the market it's not about competition for a sliver of the market. It's about who can scale. And that is a function of batteries and car bodies.
Tesla probably leads in batteries, whereas VW leads in factory capacity.
I'd think of Tesla as of an iPhone for affluent hipsters. Teslas remain connected to the manufacturer that collects extensive info on drivers (spying, some would say) and can use it for marketing or other purposes later. Teslas can be a powerful distribution channel if Musk figures a way to discreetly advertise to them right in their cars. Teslas are a golf club in a sense: a directory of important people, except that the club has managed to install mics, gps trackers and a internet connected screen right in the members' cars.
Is Tesla the only car company collecting usage data? Off the top of my head, I don't think so.
Your comment kind of reminds me of how much shit "Big Tech" gets for data collection, just because they're highly visible, while the really scary shit (e.g. cell carriers offering granular per-user location data APIs to anybody with money) flies under the radar because it doesn't have that sexy down-with-big-tech angle that (ironically?) seems to drive the most clicks.
That's not to say the usual "Big Tech" suspects are choirboys, but the public discourse's focus on their data collection activities is absurdly myopic.
Tesla isn't a car company, though. They even removed "Motors" from their name years ago - showing wider interest, and not just batteries. Solar roofing as well, and others.
I don't hold TSLA right now, regretfully, I entered pre-split at $27 and sold at $200. I also think the current price is way too high, for what it's worth. WAY too high. But it's not at all about cars, at least not for me, when trying to justify the valuation. It's about energy at large scale, and transportation at large scale. Not just car sales. Or battery sales.
Edit: Currently P/E is ~570! I remember it being 1,300 recently. Yikes.
Panasonic makes Tesla's batteries though. I've heard this argument since at least 2015. I was told then that Tesla was just leveraging Panasonic and would eventually make their own batteries. Still hasn't happened.
The P/E is probably still skewed. They're accounting for the robotaxi windfall which is leveraging their buyback program, kind of ridiculous considering the constant delays and skepticism surrounding their fully autonomous system and then you've got to consider the regulatory hurdles that are inevitably going to develop after deployment.
Take a look at the "Common Sense Skeptic" youtube channel. Tesla's purchase of Solar City is a scandal on itself, it was never a play on entering the solar roof business. It was just a bail out using Tesla's shareholders money to save Musks and his business partners (which were Musks cousins btw) investments. This channel also destroys all the hype surrounding Starship, it's a joy to watch.
Everyone should watch this video, more so people who refer to other car companies as "legacy automakers". Another good channel to remove the veil is Thunderf00t.
Criticism of Musk is one thing. The whole “remove the veil” sorta “red-pill” type language, criticism that Musk has never done anything useful or noteworthy other than scamming falls apart for anyone who has been paying attention for more than a couple years. Electric cars pre-Tesla were a joke. Tesla had enormous influence. And SpaceX (which was founded by Musk, who runs it as chief engineer) launched more mass to orbit last year than the rest of the world combined, a remarkable turnaround from the failure of US companies to be commercially competitive.
There are things worth being skeptical of. “Full self-driving,” for instance or even, sure, the Solar City deal (although arguable). Perma-skeptics like Thunderf00t, though, never acknowledge this kind of stuff.
I agree with your main point, and not all of Thunderf00t's criticism and math is valid, some feels a bit forced, like in the SpaceX debunked video. I think he unintentionally built his channel around Musk skeptics and now has to follow the track he laid for himself.
However, there's plenty of stuff to be skeptical about and I do not get the rebuttals that Musk created jobs, or helped put electric cars on the map therefore he's beyond criticism. I was his fan right till Thailand cave story developed.
I think the hate Musk gets is fuelled by such shenanigans and more so by his fanboys online.
I'm not informed enough to dig into your SpaceX claim but my first instinct would be to check if SpaceX lifted so much cargo just because they have that largest client (the US), that had no alternative options (Shuttle program discontinued). That is, no one else had clients with so much cargo lifting needs so no one lifted as much, but not because of technical ability. Because Musk likes to play with numbers like that. For example his claims about Boring company's price per mile looks impressive because he compares the boring price with the price of a complete metro project price (Thunderf00t's SpaceX debunked video has more details).
It's quite possible for the Solar City purchase to have been executed at a terrible price that is basically crony capitalism and deserves jail time, while it simultaneously being a great value add for Tesla. Controlling solar generation, backup batteries, and car charging all at once is difficult when cobbling together pieces from vendors that don't interoperate, when there's nobody else willing to write the middle ware to connect it all.
With Tesla's ridiculous valuation, they can make all sorts of terrible purchases like that and still succeed just fine.
The only new reveal is the dollar figure. Burry has been very openly (and vocally) short on Tesla for a while now. He has been Tweeting a bunch about it since September last year. Tesla shares are up ~75% since those original Tweets.
"The market can remain irrational longer than you can remain solvent" applies to both amateur traders and the most seasoned investor/genius alike.
Possibly worth noting that Burry is not the only Big Short figure to openly opine that Tesla's pricing seems way out of whack compared to its fundamentals. Steve Eisman (aka Mark Baum in the movie) was publicly short Tesla for a bit. I think he ended up closing out and losing money at some point with a rueful "It's very hard to short a stock that's a cult."
It's possible both of them are wrong and Tesla has fundamental value at a level they were unable to analyze. Or it's possible that Tesla's future will be determined by things beyond fundamental value. But it's also possible they're right on some timeline.
Infamously Musk himself tweeted 'Tesla stock price too high imo' at around (can't get accurate atm) $150; it's currently at $573.
(Not that anything Musk tweets should be taken as anything other than.. an indication that one or all of TSLA, Bitcoin, or Dogecoin is about to move rapidly in one or both directions..!)
Oh you're completely missing the nuisance of what we just learned.
Sure, he's been talking short since September, but the size of his position has grown considerably since then - almost certainly timing the S&P inclusion (sorry index investors, you quite literally paid the top price for a stock that has lost almost 45% since you bought it).
He's almost certainly made a killing with his position and the beauty is we don't even know what it is today. He could have realized hundreds of millions in gains, or he could have them all still open.
If he has the position from the filings - just today, when Tesla is down $22 - he has made over $16 million dollars in unrealized gains.
It will be hilarious watching the Musk Zealots crying to have Elon tweet something to fraudulently try to pump the stock price and try to trigger a squeeze. Meanwhile they don't realize he's doing this with options, not shorting directly.
> (sorry index investors, you quite literally paid the top price for a stock that has lost almost 45% since you bought it).
If there's a single index investor that feels saddened by this stat, in the slightest way, they should stop index investing right now. The great joy of index investing is that this single stock is down, while on average everything else is way up...
>If he has the position from the filings - just today, when Tesla is down $22 - he has made over $16 million dollars in unrealized gains.
We don't have enough information to determine that. We would need to know strikes and expirations to even start to figure that out. AFAIK, we don't have either.
Tesla can grow and sell tons of cars and the stock price might still fall.
Cisco Systems is a great example of a fantastically profitable business with a stock price that's still below peak. It's an incredibly successful company that makes more than $10 billion in profit every year. The stock price is still below the March 2000 peak.
If Tesla "only" made $20 billion in profit a year, the market would probably consider it a failure. Expectations are high.
I can see the bull case for Tesla becoming a multi-trillion dollar company or the bear case. Hard to assess Burry's position without knowing the expiration date and strike price of his puts.
I was curious and looked it up- Cisco is indeed still off of its peak stock price $52 vs $77 in 3/2000... But if you reinvested their dividends you would be a little closer! Just don't adjust for inflation!
$10k invested on 1/2000 would have peaked at $14k in March, and now would be worth $9.5k
Some interesting parallels with automotive industry here. Cisco saw huge valuation base on a perceived future. Nortel (who were more of an incumbent) also saw massive stock price increases at that time. Only one of these two companies survived. Cisco had the right tech but Nortel had fundamentally the wrong tech. I suspect we'll see something similar in the automotive industry.
>Hard to assess Burry's position without knowing the expiration date and strike price of his puts.
Even if you knew the exact pieces of paper that he held today, that would tell you nothing about his overall plan. Very few options strategies involve a one-time purchase of contracts in hopes that the dates & prices on those will hold until conclusion. For something this big, you would continue to acquire (and sell) contracts at a range of strike prices & expiration dates until the overall play is concluded.
I find the title misleading. Unless I misunderstand, Michael Burry has not actually put $530M of his money at risk. He's made a much smaller, leveraged bet. $530M is just the notional value.
So how would you go about making an educated reverse engineering claim on the stake at risk without knowing his other legs nor expiry dates? Is it even possible? How about a wide range?
He bought 8001 put options on some undisclosed date at an undisclosed strike date and price. You can take a look at the options chain for TSLA to get an idea.
For example, a $450 put for September 17th 2021 would cost about $16.70 per share:
One option counts for 100 shares, so that would be a (8001 * 16.70 * 100) 13.36 million dollar bet. Suppose that TSLA is worth only $400 on that date, with your right to sell at $450 you'd be in the money for 40 million dollars, or roughly $26 million in profits. If TSLA is worth $450 or more on that date, your options expire worthless.
> As of March 31, Burry owned 8,001 put contracts, with unknown value, strike price, or expiry, according to the filing.
You can't figure out his position with this information.
For example, you could buy very, very out-of-the-money puts for a penny. (Your bet would basically be: TSLA loses 95% of it's value in the next week.) My total value at risk for this bet (of 8,001 put contracts) would be $80.
*Small correction - the minimum value of 8000 put contracts would be $8000, since one put at a price of $.01 actually costs $1 and controls 100 shares of stock (the price is price per share)
Can someone ELI5 how this works to those of us who only buy and sell things? I've looked up the definitions, but I'm curious about the purposes and practical risk/reward scenarios of this particular sort of bet.
When you buy a “put” you are entering into a contract that gives you the right, but not the obligation, to sell X number of shares of Acme Class A common stock for $Y/share on (or sometimes within) a specific date.
So let’s say Acme Class A is currently trading at $50/share. If you think, for whatever reason, Acme Class A common stock will be trading at $1 next week you might want to buy a put that lets you sell 100,000 shares for $10/share. If the price of Acme Class A stays the same, you would never exercise the option to sell because you’d lose money - why would you sell Acme Class A for $10/share when you could sell it on the open market for $50/share? But if you’re right, and Acme Class A is trading at $1/share, you would then of course want to sell as many shares as possible at the $10/share rate. So you’d go on the open market, buy yourself 100,000 shares for $100,000, then turn right around and exercise your option to sell those shares for $1,000,000.
So the only money at risk is the cost of the contract itself because you don’t have to actually buy the shares until you decide whether you want to exercise the option to sell them.
If you want a put contract that allows you the option to sell 100,000 shares of TSLA for $0.01/share tomorrow it wouldn’t cost much because it’s highly unlikely you’d exercise the option and so, for the person on the other side of the agreement, it would basically be free money. When there’s more uncertainty then the cost of buying the contract is higher because the person on the other side is taking a risk that they’ll be stuck buying a bunch of securities at a price much higher than what they’re actually worth.
TLDR: when you buy a put contract you’re essentially paying money to someone to lock in a price.
So, if I understand it correctly, buying "puts" can be a cheap way to generate publicity around some stocks? That is, I could cheaply buy puts for half a billion dollars' worth of TSLA that are so ridiculous it's obvious I won't be exercising them, and this would give me a "500M bet against Tesla" headline?
Great explanation, thanks. Do you happen to know far out these contract dates tend to be? Is it standardized, or a thing you negotiate (at normal levels and at giant $0.5B levels like in the article)?
I asked because I figured a trading app would give me a couple standard options (pun intended), but I'm curious about how this works for professionals. I figured it would be clear that I'm not asking whether you typically negotiate a $0.5B contract on robinhood.
Options are time-limited and expire so you're betting that it goes up or down BEFORE a certain date.
You can buy very cheap out of the money options at small fractions of the cost of the shares by making bets that TSLA will drop hard in the next year while the market thinks that in that timeframe it will not.
Most of the time you lose money doing this.
Time it right, though and you can make 10x returns, but you have to be right and the rest of the market needs to be wrong, which is often unlikely.
But even if you're right in the long-term you need to also get it right in the short-term.
I don't think I'd be betting against this market right now, there's no guessing how irrational we'll wind up getting. Post-pandemic I would guess we'll have even more of an irrational bubble around back-to-normal, and a rising tide lifts all the boats.
A put is a option contract that gives its holder the right to sell a share at a certain price (strike) within a certain time (maturity for American options, European options can only be exercised at maturity). If you buy a put of strike 100 and a stock is at 90 you can exercise it thus selling the stock at 100 which is higher than its actual price.
So when you buy a put you are betting that the stock is going to go down. Each put usually gives you right to sell 100 shares, and since you can buy/sell the contract itself, you can easily get leverage when compared to actually trading the shares.
Without knowing what the strike prices and how much he paid for those contracts you can't really determine how much he is going to gain/lose. His gain is capped though as TSLA cannot go below 0.
Just like "ask me anything" does not necessarily mean anything, it's an expression at this point.
The ELI5 subreddit describes it in its rules as such:
"Rule 4: Explain for Laypeople
As mentioned in the mission statement, ELI5 is not meant for literal 5-year-olds. Your explanation should be appropriate for laypeople. That is, people who are not professionals in that area. For example, a question about rocket science should be understandable by people who are not rocket scientists."
It sounds like the short thesis is centered around Tesla’s revenue coming in large part from regulatory credits.
If you take out credits and crypto, they look like most other car manufacturers, struggling to make a profit.
> As more automakers produce battery electric vehicles of their own, ostensibly fewer will need to purchase environmental regulatory credits from Tesla, which they have done in order to become compliant with environmental regulations.
> In the fourth quarter of 2020, Tesla’s $270 million in net income was enabled by its sale of $401 million in regulatory credits to other automakers.
Except...the traditional automakers are not struggling to make profit. Not even close. VW Group made $10B last year, during a pandemic year. Toyota $19B. FCA, with their public image of "also ran", $7B. BMW made $4.5B just last quarter.
Even minor automakers like Suzuki or Kia still make multiples of Tesla's profit without breaking a sweat
Tesla sells its regulatory credits to other auto makers. Other auto makers are becoming more environmentally friendly and are weening off buying credits from Tesla.
Tesla ins't "struggling to make a profit". It never made it. Other than artificially imposed government credits, Tesla business is not and have never been sustainable. Maybe someday people will start to see Musk for the carnival barker that he really is.
I'm having a hard time with this one since from the article it doesn't seem like Burry is seeing anything that isn't very well discussed/analyzed already regarding Tesla. Short sellers have gotten very burned in the past in gambles like this, but they've also sometimes made money. Given how historically irrational the market has been about Tesla, this just seems like a gamble rather than the well-reasoned short position based on deep (and unpopular) analysis that his subprime mortgage play was.
> this just seems like a gamble rather than the well-reasoned short position based on deep (and unpopular) analysis that his subprime mortgage play was.
A short is a gamble all the time because you don't know the time component. Burry was "lucky" in that it happened fast enough. There are lots of people who want to short Tesla but don't dare to because of the cost involved in it and unpredictability of when their bet would pay off.
It's likely he's already up massively on his PUTs, which were purchased sometime in Q1. We don't really know the strikes or expiry dates, so it's hard to say.
Tesla is a bubble for sure but this is way too risky. Sure, we don’t know the strikes or expiry dates but there are plenty of fan boys to take on the fight against Burry ad infinitum.
The market can become irrational longer than you can become solvent.
I'm 100% on Burry camp though.
Well, Musk had lots of bitcoin/dogecoin on his mind lately. He is exchanging those for cars but not in a trustable way, how long do you think this can go? I don't have proof of anything but this can certainly damage the Tesla's balance sheet.
Tesla has already achieved its objective: To bring about the electric car revolution. Its secondary objective of pushing the self-driving car revolution has done so-so. How Tesla performs going forward is more of a nice-to-have, but otherwise irrelevant since the ball is now rolling and not in danger of stopping anymore.
The remaining pieces now are solar generation on building surfaces, battery tech, smart grids to route the energy efficiently, cheap space travel, cheap tunneling, and maybe hyperloop if no one picks it up.
This might be Elon Musk's objective, not Tesla's (whatever that means, as that will be a different thing if you ask it to one of its board members, to a sales person, to a developer, etc).
Michael Burry shorted the mortgage backed securities market before most other short sellers. He even suffered from redemptions of his fund and had to disallow them to stop the hemorrhage. Let’s see if his timing is closer to the downwards inflection point now. The market seems super frothy now and I am wary of calling the moment of the inevitable downward spiral. Seen this movie many times before. Just always called it too early (which means you lose). I think being a momentum trader is very hard and requires nerves of steel.
This guy has been wrong a lot recently. Admittedly, he was right once and in a big way. However, remember that success is mostly luck, and this is orders of magnitude truer for success in public markets.
Outside of entertainment, it isn't worth the time to follow celebrity investors.
Tesla is just too many things to reliably short it though. AI company, car company, transportation company, energy storage/solar company.
For example, even amid ongoing China defamation efforts, 4680 battery production 'postponed', updated S and X still being tweaked, upcoming V9 FSD beta release could make the stock blow up again as it did around V8.
The article starts out with bullet points, the third bullet point is this:
"Burry previously mentioned in a tweet, that Tesla’s reliance on regulatory credits to generate profits is also an impediment to the company’s long-term prospects"
When the Tesla stock price is tied ostensibly to some ephemeral aspect of Elon Musk, who gets his lulz from wreaking havoc on cryptocoin markets, does that kind of analysis really matter? I guess it doesn't until maybe, possibly, eventually it does?
He plays classic, shorting overpriced, buying under-priced by raw books. You can get surprise on reality benders like Steve Jobs, Elon Musk or bitcoin.
Betting against Elom Musk seems like betting from first principles against first principles guy. Popcorn and watch.
Not sure Burry priced in TSLA's cryptocurrency play, which (imo) was a giant volatility hedge that will help them make their numbers, and also, oddly, an inventory liquidity hedge that could be used to bludgeon shorts trading on sales data.
Burry is probably right about the market for electric cars and TSLA's exposure to raw materials prices and china, but he's wrong about the strategic ability of its leadership.
Not to self-reply, but this idea of having an opaque and highly volatile basket of cryptocurrencies on your balance sheet might be important. It's not cash, and it's not inventory, it's something more powerful.
It means you can sell tranches of it to make your quarterly numbers do what you want them to, with a crypto-hammer you can use to shore up numbers wherever you want. As an accounting device, their liquidity and volatility means you could use them to obliterate shorts by uncloaking a realized massive "profit" just before an earnings call.
Crypto can absorb loose cash that creates other liabilities, while carrying the value of that cash over calendar years in a super liquid asset. I'm not a corporate accountant at all, but I would wonder if these properties of crypto could be used as a superweapon against shorts.
Also related, since we are talking about Michael Burry (alias Cassandra on twitter), besides the subprime mortgage shorting in 08, another interesting bet he made was with GME (gamestop) against the shortsellers.
To clarify, Burry was long on GME, I think his bet was done in January, and ended it late december, so very likely more than 5x returns.
I wonder if due to the increase in retail trading activity, stocks are becoming less and less tethered to fundamentals. Retail people buy stocks in companies they like, and that they see as the future, regardless of whether the pricing "makes sense" or not according to traditional metrics.
I have a feeling stocks had little to do with fundamentals for pretty much as long as you were able to make more money trading them than from dividends.
Eventually somebody on Wall Street is going to figure out that Tesla’s business is batteries, that Tesla’s batteries are getting good enough to compete with natural gas peaker plants, and that there is a massive effort underway to convert our electric grid away from burning fossil fuels.
It looks like Panasonic has been planning the deployment of a 10MW energy storage system at its own facility in India since 2016. Nothing I can find says whether they actually built it or not, or what phase the project is in. Tesla is capable of mass-producing 10MW battery packs and shipping them today, with manufacturing in the US, and is winning contracts to deploy them internationally.
I'm quite skeptical, not sure those chinese PV panels consider the emissions generated by the mining, shipping and recycling of those panels.
"Cheap" or "cost competitive" is irrelevant if you don't consider the carbon cost.
It is very difficult to have an accurate carbon accounting, not to mention that fossil fuels will be burned when there's no wind or sun.
The best energy/carbon ratio has always been nuclear if you make an accounting on a full year.
It's important to define on what field one would compete, because there are no moral incentives to compete on carbon emissions, and monetary cost is decorrelated from the carbon cost. It's easy to shift emissions from one place to another. Anybody can say "green energy is cheaper", and define solar panels as being green while their carbon balance sheet is not so good.
nb: According to the article, $530m is the notional value of his puts, not the premium he paid. 8k contracts is a fairly substantial trade on a $566 stock, but it's not as sensational as the headline makes it sound.
So how would you go about making an educated reverse engineering claim on the stake at risk without knowing his other legs nor expiry dates? Is it even possible? How about a wide range?
Realistically, if he made these trades OTC versus his prime broker, only the prime broker (ie, an investment bank) would know. That's how many of the biggest trades are done. The bank may lay off the short vol slowly, or cover it with several strikes and maturities using automated tools. The only time a bank would hedge aggressively is when they expect the customer to come back and do another piece of the same trade. Presumably if they thought the trade were extremely toxic, they would have passed on it.
If the contracts were listed, option traders would look at big trades that hit the tape without contingent stock printing simultaneously, and call the brokers that crossed those trades to ask which bank sent the order to the floor. Then they'd compare that against banks which are believed to trade with Burry, and filter to get a guess at how much he traded. This may be tough with TSLA because there is so much activity, but in smaller names where only a couple of big prints go up daily, it's pretty easy to figure out who trades what. The banks that trade options against big players get quoted on a lot of stuff that eventually trades at a different bank, so they can often infer the identity of the client when they see the print hit the tape.
CNBC, on the other hand, know nothing and simply report what they are told and what they observe in regulatory filings. Their chief function is not to break news, but rather to distribute it -- like a buddy who is very up-to-date on current events.
TL;DR You can often deduce some of the characteristics of a position, but there are ways for a very stealthy market participant to hide the characteristics of his stake.
> Besides his “Big Short,” Burry made a killing from a long GameStop position recently as the Reddit favorite made Wall Street history with its massive short squeeze.
Except I remember reading that he sold for before the price exploded [1]. So although he made a profit, he missed out on the squeeze because he sold too early.
I'm not saying he's wrong, but the article is misleading. The massive squeeze didn't happen until late January, and Michael had sold his position by the end of December. So although he was right/made a profit, he didn't make a killing from the huge squeeze that made the news.
As options can grant the buyer significant leverage with each option representing 100 shares, the sum they came up with for the article title is likely a misrepresentation, and if the bet goes wrong notably less money will probably be lost. Either way I don't think articles of this nature are particularly useful however.
So how would you go about making an educated reverse engineering claim on the stake at risk without knowing his other legs nor expiry dates? Is it even possible? How about a wide range?
I don't think it's possible. He's also not saying if he's actively managing his puts. He may be actively rolling the date or the price to cash in on red days and re-buy on green days. There's many ways to make a big short bet on a volatile stock pay for itself with day trading until it's no longer a bet and just a free lottery ticket.
All the weak shorts have washed out or got tired of bleeding premiums for the past 3-5 years - it will be interesting to see if this will reignite that community to put them back on. Long Tesla is very much a pro-cyclical business, if you read between the lines, Burry is also expressing his $500mm opinion that this cycle is coming to an end.
I am not a fan of public figures (seemingly) using their power to attempt to influence price movement in equities.
The market action following someone like Elon Musk’s tweets about $GME, DOGE, and others, show high correlation with the sentiment in those tweets, at least from my armchair. Sure, Burry was correct in a similar scenario before. I don’t believe that means others should immediately believe/trust and follow individuals like this to the end of the earth, however.
Shorting a stock is a very different - and far more risky - investment “strategy” than the purchasing of a stock. I should know, I lost 2 months of gains on a single short over a 3 day period, despite all market intelligence, facts, and the logic which follows, pointing to the fact which the stock should have bottomed, not skyrocketed.
Despite most of its participants being relatively predictable, the market never ceases to surprise. Headlines like this should at least lead to an article with a highly visible notice or disclaimer about the risks of mimicking the mentioned behavior.
Edit: I see I am being downvoted without discussion. I’m open to learning what I may have missed.
There is so many people claiming a bubble on Tesla comparing it to a car company and pointing to fundamentals. Tesla is a high growth technology company. Their valuation is all about what they could become.
The most talented young people all want to work for Tesla. They have made tons of progress and they have the culture and plans to continue to innovate. None of the old car companies can attract the talent the way Tesla does. They only need to capture the market on one of their big bets to be a runaway tech stock like FAANG.
They've got electric cars, batteries(Powerwall), Solar roofs, cross country supercharger stations, and full self driving. Any one of these things could fuel a company by itself.
I mean, you can also say he has Tesla investments. Long puts are a type of short position which is a kind of Tesla position. However, since it is far more specific it conveys far more information.
Actually, this will likely be unpopular here, short sellers do have an important role in the economy. In the case of GME and more recently short sellers have been making money on crushing viable businesses (which they should not be allowed) but historically they expose fraudulent companies.
I don't like companies getting pushed out of business by big short sellers or making money but just publishing bad research under guise of shorting a company. I also detest fraudulent C-suite executives.
People keep saying this but I'm still not sure I buy it. Everyone in the finance industry has some excuse for why their particular gig deserves to exist (HFT / hedge funds / shorts) but economics are complex and having a plausible-sounding reason doesn't mean it actually does help the economy / markets function in the long run.
Do you have any examples of shorts actually help uncover fraud? Or is it more just when the fraud is uncovered (by someone else, say a 3-letter federal agency) the shorts make money, but they had no hand in actualizing the outcome.
> In the case of GME and more recently short sellers have been making money on crushing viable businesses (which they should not be allowed)
How was GME crushed by short sellers? Before the stock got pumped it was already looked like it was going down the drain due to noncompetitive business practices compared to best buy or amazon.
I personally am against selling equity that you don't own. It creates so many failure modes for the equity markets (failure to deliver chief among them). And I wouldn't be surprised if the net impact of short selling were actually positive for spot price, because shorts tend to sell into strength but they often squeeze into weakness.
We've gotten accustomed to short selling and buybacks, but the equity markets would make far more sense if we were to outlaw both practices. Borrowing something to sell it is a recursive behavior, as is buying shares of yourself. In markets as in computer programming, we have to be careful about recursive behaviors.
>It creates so many failure modes for the equity markets (failure to deliver chief among them).
Has this actually caused issues? Stock prices usually go up when the economy is doing well, so when short sellers default the economy/banking system is well prepared to absorb the impact. This is as opposed to something like MBS which causes a downward spiral of "people losing their jobs -> default on mortgage -> banks pull bank loans -> business spending drops -> people losing their jobs".
>the equity markets would make far more sense if we were to outlaw [buybacks].
Why? Buybacks are equivalent to paying dividends and then reinvesting them (which most people do).
That was one of the issues for the clearinghouse with GME. When a market-maker sells short, they don't have to locate inventory prior to selling. Sometimes, they are unable to deliver to the clearinghouse, which technically forces the clearinghouse to remain short to the buyer. A "buy-in" is supposed to take place when a short seller cannot deliver, but this doesn't happen with market-makers because they get extra time under the rules, and also they tend to trade so much that the clock resets on their past undelivered shorts every time they buy and sell (this is called a "reset transaction" and it is illegal for any other market participant to do). If a market-maker gets caught wrong-way on a position where they sold lots of shares that they neither own nor have the solvency to buy at market, they can collapse and that puts the clearinghouse itself at risk. This is why a firm like Citadel (one of the biggest market-makers) had an incentive to capitalize Melvin Capital with $2B to attenuate a squeeze. IMO it was self-preservation, not charity nor opportunity.
MBS wasn't a problem because of the defaults themselves. It was a problem because the correlation of defaults was underpriced, so banks took heavy losses on positions that they thought were pristine.
> Why? Buybacks are equivalent to paying dividends and then reinvesting them (which most people do).
This isn't true. Buybacks do two things that make them highly attractive to executives. First, buybacks allow option holders (including many insiders) to generate capital appreciation on those options without exercising them. Dividends, on the other hand, distribute only to shareholders and actually reduce the price of the stock (share price drops by the amount of dividend on ex-date). Second, buybacks provide a perpetual bid to the stock that mitigates the downward impact of selloffs, which is particularly nice for executives that receive performance incentive bonuses based on share price. With something like an ASR (a more complicated buyback traded against a derivatives desk), buying may even get more aggressive (in terms of % of total volume) as the stock declines. Buybacks are rationalized as capital return but really they are a form of inducing asset inflation.
> Borrowing something to sell it is a recursive behavior, as is buying shares of yourself.
no, it isn't. this is nonsense, you're just trying to equate some reasonable market activities with something that sounds a bit scary and weird because you don't understand it.
> ... in computer programming, we have to be careful about recursive behaviors.
no, we don't. no more than of any other failure to terminate a loop.
If I borrow a share and sell it, I can later borrow it again and sell it again.
That is recursion.
When it hits a base case -- eg, I get liquidated -- all of those shorts have to be simultaneously covered. Doing so can create a stronger bid than the float of the asset.
> no, we don't. no more than of any other failure to terminate a loop.
A loop that can be done in-place, or in constant space, is less space-complex than a recursive function that cannot. Surely you have had situations where writing a top-down recursive function requires more memory than achieving the same result with a bottom-up recursive function, or vice versa. That doesn't happen with an iterative loop where I can better characterize the space required a priori.
There is no rule in Regulation SHO preventing market-makers from selling a greater number of shares than the float, and there is no rule preventing any short-seller from borrowing and selling the entire float multiple times over.
It's exceedingly rare in practice for the short float to exceed the public float, and there's an inbuilt negative feedback which stops this from happening. The larger the short float %, the lower EV shorting becomes, ceteris paribus, and eventually the marginal benefit becomes negative and no rational actor would add to a short. That's one of the reasons (among others) why we almost never see a short float above 100% of the public float.
Additional regulations aren't needed for this, because it's not a problem.
That perspective would be more believable if it hadn't happened with GME. Once you know there is zero price elasticity of demand, the price ought to fly extremely high and therein lies the problem. It is totally antithetical to the concept of an orderly market.
When you find an edge case, the solution is to mitigate it, not to say "well it's an edge case so it will probably never come to fruition."
Zero price elasticity of demand is definitely antithetical to a healthy market.
What we disagree on is the role that short floats exceeding 100% plays in causing that.
The 3 causal factors behind squeezes are social media, public float, and short float. Short float is the least important variable of the three, by a large distance. GME-like moves happen fairly often, and in most cases these are low-float stocks without much short interest, such as SPI or PPSI, where only a small number of price-insensitive players are needed to cause a 2000% move.
In fact I think the short-float itself is mostly irrelevant from a first-order causality perspective. It's mostly only relevant insofar as it fuels narrative and herding on social media. If the GME short-float was 90% (instead of 130%), it would've reduced the squeeze potential largely to the extent that it reduces the potency of the social media narrative, but not so much beyond that.
My view is that no additional restrictions should be placed on short-selling. The practice itself is healthy because it encourages the uncovering of frauds (such as Wirecard), the practice is necessary for derivatives hedging, and the recursive nature poses very little risk of spiralling due to the inherent negative feedback yet would be rather expensive to regulate (and this negative feedback hypothesis is backed up by the empirical observation that there was only 1 stock with a > 100% short-float).
100% of float isn't necessarily the point where short interest gets dangerous, and an individual share (imagine you tag it and track it) can be sold short and lent out again for short sale in repeated transactions, even if short interest is nowhere close to fully saturating the float. The point where shorts equal the float is simply a salient mile marker. When shorts cover aggressively or get liquidated, natural sellers who figure out what's going on will hold out for a higher price because they know the bid will persist. All of this is tied into the problem with no-locate short selling. Market-makers have a profit motive to offer shares below where the natural sellers would be offered, because in addition to profiting from the dislocation between trade price and the value of the asset, they also profit from encouraging two-way activity because it means more business for them. It plays out like this:
* ShortSeller Capital chases the stock higher as it covers a toxic short in XYZ stock,
* XYZ stock gets so elevated that market-makers can't resist selling it short despite having no borrow in the name,
* ShortSeller Capital has handed its short off to a market-maker who will patiently work itself out of the short shares.
Here we encounter one of the problems with the locate exemption for bona fide market makers. There's no need for a natural seller to be involved in a short-covering transaction, even if there is zero borrow available to market-makers. In other words, the market-makers sell something that they have no means to deliver, but the regulations give them extra time to wait for it to materialize in the market later. The clearinghouse carries counterparty risk against the market-maker in the interim.
If the market-maker cannot buy or borrow in time, the problem loops but you get one fewer market participant who is willing/able to sell the shares, and therein lies the runaway condition.
> The practice itself is healthy because it encourages the uncovering of fraud
I reluctantly agree with this oft-repeated refrain. Long holders have an equal or greater incentive to discover frauds when compared to short-sellers. The difference is that short sellers have a greater incentive to draw attention to fraud. After longs close, they have very little reason to share suspicions of fraud because there is zero financial upside and some reputation risk involved.
Yet presumably in so highly regulated an industry as high finance, is the job of government to enforce laws and uncover fraud.
> the practice is necessary for derivatives hedging
Equity derivatives hedging would get very complicated without short selling, price discovery would get weirder, and liquidity would obviously get thinner. That said, I doubt a weakening of put/call parity would hurt the economy in any meaningful way. It's not the same as, say, commodity derivatives where being short a future is a straightforward position for producers, and where options on futures can serve as a form of insurance for firms whose operations depend on the underlying commodities. In the equity market, who really needs to own a put if they can simply sell the stock or trade CDS? How much of the institutional volume is hedge fund speculation that provides essentially zero utility to people outside of the institutional equities business?
"If the market-maker cannot buy or borrow in time"
This wouldn't be an issue at most MMs who trade a diversified basket with a small position size on any single instrument. But based on my understanding, it does sound like a systemic risk.
What about a rule such as "you can't short more than 5 percent of the float", + require them to keep cash as collateral, as a way to sensibly limit the risk without banning the activity outright?
In your example, the MM was providing a valuable and healthy service because they were trading against the rip and slowing down the squeeze.
"hedge fund speculation that provides essentially zero utility"
I don't agree that hedge fund speculation provides zero value to the economy.
I believe on net they provide zero value to their customers since there's an oversupply of them and perfect competition has driven margins down to below fees. They rely on a hucksterish confidence game to trick customers into investing.
But security pricing is important to get right since it guides trillions of dollars of capital allocation in the secondary market. A world where Moderna gets that next billion is much healthier than one where GME gets it. So as an industry they're adding lots of value that way.
> Shove it to them. We don't need pessimists in this world.
Of course not. We only need optimism to keep driving the stock market and other valuations only higher so that they are no longer rooted in reality/math/science and are driven solely by optimism.
And, let's keep burning the fossil fuels since we don't need pessimism that the climate change people seem to be spreading. Oh, wait, that goes against TSLA, so we need that pessimism.
It's not even about that. It's just about not wasting an opportunity to make money. Some stocks go through cycles: growth, then correction, then growth again. Shorting stock during market corrections helps you maximize your profits.
I mean, I can imagine Michael Burry cashing $200M profits when Tesla price goes down, and then switching sides and going long. The most important thing in the stock markets is to remain rational. Don't let your personal like or dislike of Elon Musk stop you from making money.
And btw: since March 31st Tesla stock price fell down about $100
I think you bring up an very valid point. In the Tesla forums I see posts from only one person making money over shorting Tesla stock. He works on making $10-$50 a share whenever the stock falls and then he makes money as a long when the stock goes up. Over time he has made a lot of money. He is not greedy, he is steady.
On the other-hand, I see tons of people gleefully saying how much they hate Elon and because of him Tesla is going to collapse and as soon as that happens they will make a ton of money. I keep asking them to post when they make this windfall, well it has been over five years for me and so far not one of them have come back to tell how much money they have made. Greed seems to be blinding them to how much their approach is failing.
The rational player has been making money for years, the ones who seem to be basing their investments on emotion have never come back to say they made any money.
PS. I am a long, I bought Tesla stock at $189 pre-split, even at today's lower prices each share now represents $2825, it has to fall a lot for me to be taking a loss.
He seems to have an excellent sense of the underlying value of assets and enough cash to hold plays for a few years until they are where he thinks they should be. On timing, he seems to be far too early to maximize profits, but I seem to recall him saying something to the effect of he'd rather be too early than too late.
However, I could be very wrong. All I know about the man is what I've read about him.
Which is why TSLA is so overvalued, same game, different scale. There are a lot of Elon Worshipers who pump the price as well but TSLA has basically no proof that they will fulfill any of their advertised goals.
When the truth about housing was exposed, the financial system was forced to reconcile. The system has measures in place that must be taken by policy. Ergo, the truth shatters that house of cards.
But Tesla? Meet Nikola! The fakest company ever, with no product, no development, a proven liar/scammer leadership, with failed deals and vapourware. Still. Worth. Billions.
The kids on RobinHood (and many others) are playing a different game, so the 'truth' matters less.
This is why I'm wary that market reality may not take hold for Tesla - and - that this reality is skewing a lot of other securities as well.
I almost wishing the Fed would bump up interest rates just a little to bring some reality into the markets.
But their price only makes sense if they end up being the only car maker left.
That's not realistic. Building an electric car is not that hard, especially if Tesla already did all the hard lifting for you.
For a while I was thinking that the battery play - becoming the number 1 battery supplier - will justify the price, but what I see right now looks like there is many players, old and new, moving in.
I won't short them tough, in the end I'm just a dog on the internet and have no clue how stonks work.