Counterparties: Tesla stock goes vroom!

May 9, 2013

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It’s been a big week for Tesla: The electric car maker announced yesterday that the company turned a profit last quarter for the first time in its history, while saying it would stop regularly releasing the number of reservations it has taken for its cars. That means the market will lose the data it had be using as a metric for measuring electric car demand.

Tesla’s results came as Consumer Reports gave the Model S a rating of 99/100 – the first time a car has achieved that rating since 2007. The company’s stock shot up 24% overnight.

Tesla’s surging share price might not have all that much to do with its quarterly results. Rather, it looks like a classic short squeeze: in early April a whopping 60% of all tradeable Tesla shares had been sold short. Those shorts are in a world of pain right now, and the stock will probably just continue to rise until they capitulate and cover at a massive loss. It’s beginning to look a lot like the Porsche/Volkswagen short squeeze back in 2008. Here’s the Tesla stock chart, since its IPO:


There is more to the Tesla story than just stock-market fun and games. Being environmentally friendly is an incredibly lucrative business right now in the auto industry. According to the LA Times, “Tesla’s earnings were enhanced by sales of environmental credits to other automakers; these credits are awarded to clean vehicle makers as part of California’s efforts to reduce air pollution. Sales of the Zero Emission Vehicle credits generated $68 million in revenue for Tesla in the quarter.”

The company is also profiting on its renewable fuel credits, according to Izabella Kaminska, because of a US law that requires refiners to blend more biofuel into their gas each year, or buy what are known as RIN credits. Because older car models don’t run well enough on the amount of biofuel that will soon be required in gasoline by law, all American refiners and fuel importers have to buy RIN credits, which Tesla is happy to sell them. – Shane Ferro

On to today’s links:

Yikes
China is running out of ways to grow  - Quartz

Crisis Retro
With a $59 billion dividend, Fannie Mae will help the US avoid the debt ceiling (for a few months) – WSJ

UGH
100,000 homeowners received national mortgage settlement checks for the wrong amount – NYT

Crime And/Or Punishment
Phil Falcone has agreed to a loophole-ridden 2-year ban from the financial industry – DealBook

Alpha
If hedge fund managers are so smart, how come they can’t beat a basic index of stocks and bonds? – Matthew O’Brien

Wow
Most nights, Netflix accounts for one third of all web traffic in North America – Businessweek

Austerity Bites
Without austerity measures, US unemployment would be 1% lower and growth would be 2% higher – NYT

Oxpeckers
Politico is testing a pay wall – Michael Calderone

Data Points
The problem with the latest bull market: just 52% of Americans own stocks - NYT

And, of course, there are many more links at Counterparties.

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Comments
11 comments so far

Tesala makes a sweet sweet looking car. I very much doubt the will ever make any money… yes yes they made 11 million… call me when they have positive retained earnings on their balance sheet… my phone might never ring.

To justify their current valuation they need to earn roughly 500 million/year in profits… they don’t even make 500 million in sales!

Toyota makes 3.5 billion on 225 billion in sales.
Ford makes almost 6 billion on sales of 134 billion. Nice money but not a 5% margin.

To value TSLA at the current price is to believe that they will make a profit of $10,000+ per car… a sum only which only ultra-luxury brands even aspire to.

Or you have to believe that the upper middle class will get comfortable with a $799/month car payment.

They have awesome world leading technology… but it doesn’t scale.

Posted by y2kurtus | Report as abusive

” Politico is testing a pay wall. ”

Am I the only one to find that funny?

Politico isn’t the WSJ.

Posted by Frwip | Report as abusive

Could you elaborate on how exactly Tesla is going to sell RIN credits, unless they are now manufacturing ethanol.

Posted by TomLindmark | Report as abusive

Per the linked LA Times article “Tesla’s earnings were enhanced by sales of environmental credits to other automakers; these credits are awarded to clean vehicle makers as part of California’s efforts to reduce air pollution. Sales of the Zero Emission Vehicle credits generated $68 million in revenue for Tesla in the quarter.”

Posted by MitchellW | Report as abusive

Tom,

Every manufacturer is issued a number of credits per vehicle they make. Cars that are bio-efficient do not use these credits, and they are then used to offset vehicles that do not meet standards, such as trucks and vans and SUVs.

Since all of Tesla’s cars meet the standards, they have excess credits. They sell these credits to other car companies, so those companies can continue to make gas guzzlers and oil belchers. This does raise their cost of production some, but is cheaper then trying to redesign their vehicles to be as environmentally efficient as needed, so it continues.

==RED

Posted by REDruin | Report as abusive

Selling them a little short (see what I did there) to say they’re just doing well because they’re environmentally friendly. They make wicked awesome cars & wouldn’t have gotten top honors from CR if it was just a marketing scheme.

Posted by TheGreenMiles | Report as abusive

It appears, from the chart, that “hedge” funds also lost more money than the stock/bond index in 2008, which would undermine the best argument in defense of hedge funds’ lower returns.

Posted by dWj | Report as abusive

y2k, they are making money, and I have no doubt they will grow their earnings. However, you know very well that valuation often gets ahead of earnings (see AMZN). Also, their sales for this year should be almost $2 billion.

As for their technology not scaling, I think it definitely will. The improvement in overall quality and value from their first car (the Roadster) to the second (the S) was incredible, while the price dropped 40% (not adjusted for inflation) for the same range battery. They sell more of the S in about five weeks than all of the Roadsters they sold in about three years. The S is better than the Roadster in every criteria except one (0-60 time is not quite as fast), and the upcoming X should maintain that trend.

The biggest obstacle to delivering a car that is affordable for more people is the cost of the battery, and while that technology does not obey Moore’s law and double every three years, it still grows faster than inflation. I have no doubt they will be able to offer $40,000 electric vehicles that will compete with cars in that price range before the end of this decade, if not sooner.

Posted by KenG_CA | Report as abusive

I bet KenG_CA is correct. I bet they will reduce battery costs… I bet the X will be a great looking car. Even if they achieve your prediction of selling a $40,000 car that just gets them to parity of the Volt which is far better suited to American drivers who might like to go to the beach, or the ski mountain, or to visit grandma all of which might be just out of battery range.

Remember that the batteries are best on day 1… the best batteries in the world won’t work as well in year 3 or year 5 (when the car still won’t be paid off.)

TSLA makes by far the coolest most powerful, best in every way electric car… and they will sell several of them when gas hits $10.

Posted by y2kurtus | Report as abusive

Knowing nothing, I would bet that battery technology has not yet matured. I know some who will argue that an EV is already cost-competitive with gas powered vehicles (lower maintenance, cheaper operation), and expect that will only improve with time.

The Volt is a compromise, as are hybrids. Unlikely to realize the full potential of EVs until the technology gets to the point that you do not need to install a dual power system in every vehicle. Could argue that we’re already there for daily use?

As for driving five hours to Grandma, how often do you do that? Drive to your nearest rental place, pick up a car with a longer range, and continue on with your trip. It is foolish to purchase a vehicle on the basis of occasional needs — like those who buy a large SUV for that family trip once a month, but otherwise commute solo.

Posted by TFF | Report as abusive

We bought a Tesla after driving the same Volvo station wagon for 21 years. My husband decided to go all in for something a little different. What can I say – other than, I can attest to having thought a lot about the “five hour trip to Grandma’s,” which is actually just about how far away my mother lives. I make that trip once a year, and I will probably use my other car to do it. So a Tesla definitely has that downside, but we love it for commuting and for weekend trips. You have to plan, and right now, the most reliable charging option is a KOA campground (there not being otherwise a lot of crossover between the KOA and Tesla demographic) and other assorted oddities. To me, the main obstacle isn’t really the range, so much as, the thing costs a lot of money. It’s definitely still a luxury purchase and Tesla’s real challenge is to be able to produce a less expensive vehicle.

Posted by rb6 | Report as abusive
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