Never a day goes by at the moment without some sensitive news on Tesla. The company really is an enigma, perfectly encapsulated by its outgoing CEO Elon Musk. Anecdotally many owners of Tesla electric cars are also owners of the shares which is somewhat unique. But the hype around changing the automobile sector, which has been almost entirely powered by the internal combustion engine since the beginning of the 20th century is a compelling story: this with an auto pilot self-driving technology added, makes for an exciting prospect not only as a consumer but also as a company to invest in. This picture clearly resonates with investors: since 2010 where the shares were trading at $16 they have increased over 2000% to an all-time high reached last year at $389: the real growth in share price came between 2013 to 2015 when the share price increased from $25 to $260.
Since 2017 however the share price has been stuck in a range of $240 to $380 and certainly the upward momentum in the share price trajectory has cooled. Indeed with the current market capitalisation of $47 billion and an eye watering cash burn of over $2 billion a year some are asking if the current business model is sustainable. By being a public company you have the dual prospect of investors buying your shares in the belief the share price will increase - but also you have prospect of investors shorting your shares, should they believe the company is overvalued. Short selling is where you bet against the upward move of a share, you do this by borrowing shares, for which you pay a fee called the borrow rate. Shorting remains a strategy employed by various hedge funds and investment companies and can be extremely profitable.
And this seems to be the crux other the matter at the moment: various investment institutions and hedge funds seem to be taking an active short position in Tesla in the belief the shares are overpriced. Some are even calling for a fund raising issue early next year: this is in stark contrast to not only owners of Tesla cars and shares but also its outgoing CEO, Elon Musk. Controversially and vocally admonishing financial analyst’s on Tesla’s earnings and investors calls and also on social media - came to a head over the tweet where he alleged a funding deal had been reached with Middle Easton country to take the company private at a valued price of $420: This has since turned out to be false and the CEO himself was reprimanded by the SEC: It is likely more potential lawsuits will follow on from this as well.
So how will it turn out?
Certainty the story for electronic vehicles from Tesla is an exciting one, as is the auto pilot feature. I say this from a potential customer point of view. But competition from the incumbent industry standard auto makers now means electronic vehicles are at the forefront of their strategy, with many models now in mass production. Not only do these automakers have a profitable business model from their internal combustion business side to fund this new sector, but they don’t have the heavy the cash burn that Tesla has. If the fund raising issue turns out to be true, I would expect to see a break of support at $240, the recent cycle low, and then this would set up for a move towards $150: the low from 2015.
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