In Focus: Tesla Bulls and Bears
Updated: Apr 12, 2020
This week in the markets Tesla (TSLA) investors saw their Tesla investment boost their trading accounts and bank accounts, and the Tesla shorts watched their losses get bigger and bigger. Another example of money isn't lost, it's transferred, and last week the Tesla bulls were the recipients of a very large money transfer.
Tesla's stock closed the week at $748.07 per share. Tesla's stock finished January trading at $650.57 per share, and last week hit an all time high of $968.99 per share before cooling down a bit. It was an amazing week for the stock, which increased by almost 15% on the week, and cost investors betting against the stock billions of dollars.
For investors who like stories Tesla has presented a good one. It's a classic tale of bulls versus bears and fundamentals versus sentiment.
If you are a new investor or seasoned vet, there is a lot to be learned from Tesla's massive run. The lessons I'm going to discuss can make you a lot of money or cost you a lot of money.
The Story of The Bulls
While they've seemed crazy at times, Tesla has always had its share of bull and extreme bull investors. In April 2019, Ark Invest's Cathie Woods for example discussed a $4,000 price target for Tesla. Even after hearing her well made points backed by her company's research, people questioned the call. Cathie Woods' CNBC appearance and Tesla endorsement came after the SEC investigation into Elon Musk. Even after Elon Musk gave investors like me so many reasons to stay away, Cathie Woods was all in.
Cathie Woods' story is one of a smart, informed, patient bull. Ark Invest did their research on Tesla and had all the information on how the company could increase in value. From there it was just a matter of staying patient and waiting for the rest of the street to catch up. The street has caught on, and Tesla is up roughly 78% since the start of the 2020.
The lessons to be learned from Tesla's amazing run from $257 per share (When Cathie Woods discussed her $4,000 price target) to now is to trust your research if it's worked for you before. Ignore the noise, even if that noise is the company's own CEO. Be patient because the stock market is a device that transfers wealth from the impatient to the patient.
It's not at $4,000 per share, but it is well above where Cathie made her call.
The Story of The Bears
Tesla provided enough reasons for investors to be bearish. Elon Musk's inability to stay off Twitter, which led to Tweets that made him the subject of an SEC investigation. There was also his back and forth name calling with an English diver. While some people viewed Elon's behavior as just tweets, and the way his brilliant mind blows off steam, others, like myself, viewed Elon's behavior as a distraction. No investor wants to invest in a company with a distracted CEO.
For the Elon and Tesla fanboys and fangirls out there, the tweet's weren't a big issue, but for professional Wall Street investors the tweets were one piece of a bad pie. Wall Street saw a company burning through money, they also saw the possibility of debt funding for Tesla drying up, which would leave the company with even more cash issues. There was also Tesla setting production goals and then missing those production goals quarter after quarter. There were a lot of reasons for the bears to pile in on Tesla, and for a period of time they were right.
In August 2018 Tesla was trading close to it's resistance level of $375 to $380 per share. By October 2018 the stock was down over 100 points from the resistance level. By June 2019 the stock was trading below $200 per share. At that time the bears were winning, Tesla and Elon Musk were on the ropes.
The Story of the Fundamentals
Tesla's fundamentals have always been shaky. The smart money saw a company burning through cash and missing production goals. They also saw the Tesla and Panasonic relationship erode over time. Panasonic, Tesla's partner in battery production had issues with battery production timelines, cost, and culture according to an Elektrek article.
There was also the competition, which analysts - myself included - expected to enter the market in 2019 and steal market share from Tesla.
At times Tesla seemed to be drifting further away from being profitable, and a CEO who was bad at using Twitter and hitting production goals only incentivized the bears to short the stock.
The bears weren't shorting Tesla for the sake of shorting Tesla. Nor were they shorting Tesla because they didn't like Elon Musk They were shorting Tesla because the fundamentals didn't support the valuation. It wasn't personal, it was strictly business.
The Story of Sentiment
Elon Musk and Tesla have a cult following. The closest thing I've seen to it is the following Steve Jobs had. To the Tesla cult Elon can do no wrong, Elon is a genius, he's always right or going to be right and everyone else is wrong or will be proven wrong. Find any video on YouTube that questions one thing about Musk or Tesla and you will see the cult in the comment section. No matter how accurate the critique of Tesla is, the cult doesn't care, they defend Elon and Tesla as if they have their own money riding on it.
In the influencer driven market we live in today, the word of the influencer means more than any Wall Street Harvard educated investment analyst. Today's influencers love Tesla and love Elon Musk. Within the YouTuber community, from the creators doing okay to the really successful creators, they've made Tesla their car of choice. While you will find YouTubers owning other cars and even multiple cars, Tesla has become a part of the YouTuber starter kit. Start channel, gain followers, monetize, buy a Tesla.
The positive sentiment for Tesla has always outweighed the shaky fundamentals. There are videos and write ups of brand new Teslas being delivered with major issues. Issues like the doors not being aligned or door handles not popping open among other issues, and yet the overall sentiment of the video is, "I love my Tesla!" It's almost impossible to develop that kind of brand cache to the level that Tesla has. For those short holders who have allegedly lost billions of dollars betting against Tesla, this was their blind spot.
Short sellers understated the positive sentiment surrounding Tesla because it didn't come from industry professionals. I'm positive that this time last year, of 10 professional Wall Street analysts in a room, the majority would have been bearish on Tesla's stock. The same room with 10 average people, and the majority would have been bullish on Tesla the car maker.
The lesson here is to always be aware of sentiment, and to make sure you are on the right side of it. A large number of stocks have no significant sentiment either way, those that do the sentiment comes from Wall Street professionals setting buy, sell, or hold recommendations on the stock. Fundamentals are important, it's how I make all of my investment decisions, but sometimes fundamentals can't beat sentiment.
Fundamentals also change, and for Tesla the fundamentals started to change in Q3 2019. Tesla reported a surprise profit during its earnings release. Elon and company were expected to lose $0.23 per share, instead they ended up making $1.91 per share. For Q4 2019, Tesla reported another profitable quarter, this time beat earnings estimates by $0.38 per share.
Tesla was evolving, and the Tesla short sellers who refused to evolve with the news and updates have caused themselves and their clients massive losses. One article put the paper loss of Tesla short sellers at $2.5 billion. That's a lot of money to lose to prove a point that the fundamentals don't support the valuation.
I've written about Tesla several times in the past and have been very critical about Elon Musk's behavior. My thought has always been if I'm investing in a company I need a grown up at the head. A grown up who is considered a genius would be great, but I'd take a focused grown up of average intelligence over an unfocused genius who participates in Twitter feuds. Even with those views I never shorted the company long term. Yes, I played a few day trade shorts here and there when a pattern presented itself, but I was in and out within minutes. To me, the sentiment for the company was just too much to bet against. Unfortunately the infamous Tesla shorts didn't read what I had to say or just didn't care about the sentiment of the common person, and for that they lost, they lost big.
Today, bulls and sentiment beat bears and fundamentals.