Is It Time To Short Tesla?

Tesla (NASDAQ:TSLA) finds itself in a tough spot as surging short selling pressure continues to evoke comparison to what befell Valeant a few years back. Since the start of August, the stock has lost more than 20% in market value amidst concerns that things are slowly getting out of hand.

Tesla has experienced wild price swings over the last three months. The unexpected swings have come amidst emerging concerns about the company’s long-term prospects. Management squabbles, regulatory pressures, supply chain disruption concerns as well as financial health woes have all but dealt the stock’s sentiments a big blow in the market.

Musk vs. SEC

The recent plunge below the $300 a share mark, stems from growing concerns about Elon Musk leadership at the helm. Ever since the charismatic CEO tweeted that he was planning to take the company private, things have gone south. The fact that the remarks were made on social made rather than using the proper channels did not go well with regulators.

The U.S Securities and Exchange Commission has since hit the executive with a$20 million fine. Musk was also forced to relinquish his role as the chairman of the board. The fact that the company was also hit with a $20 million fine because of the executive’s misdoings did not go well with investors.

This is in part because there was no indication that the board was involved in the privatization push even though Musk is the majority shareholder.

Supply Chain Woes

In addition, Tesla could struggle to meet its car delivery targets on supply chain disruptions. According to Fahmi Quadir, a good number of the electric car company suppliers are on the brink of filing for bankruptcy. According to the high profile short seller, most of the vendors are yet to receive paychecks even on making deliveries.

The fact that most of the components that Tesla uses to manufacture its cars are single sourced ultimately spells trouble should the vendors go bankrupt. The company could struggle to meet its production targets, something that could end up affecting its production capacity.

“We question the ability for Tesla to actually deliver on their promises to their customers when they’re on the brink of potentially a massive supply-chain disruption. We see very little contingency planning, and we also see executives from the supply chain department departing in recent weeks and months.,” said,” Quadir in a Bloomberg television interview

After betting on Valeant Implosion in 2015, Quadir believes the same fate could befall Tesla as it finds itself in a rock and hard place. The 28-year old and founder of SafKhet Capital Lp has already initiated a small short position in the electric car company stock.

Financial health Concern

Tesla according to the short sellers is grappling with weakening underlying fundamentals that don’t justify a premium price in the market. For starters, the company needs to raise money through equity or debt offering given that it is already struggling to pay its bills. According to the short seller, this is the same developments that Valeant struggled with before it imploded.

Quadir concerns about Tesla’s cash problems could have some truth given that the tech giant has continued to burn cash at an alarming rate since it went public. However, the CEO insists that the carmaker is on the verge of earning money and generating cash on the Model 3 production.

Whether it’s true or not is still a point of discussion given that Tesla ended the first half of the year with $2.2 billion in cash. In contrast, it had short-term debts amounting to more than $3 billion. In July, the company found itself in yet another scandal amidst claims it had asked suppliers to refund it some of the payments as it sought to register profit on its books. The state of Nevada is also pursuing the company over unpaid $655,000 in unemployment tax bill.

A Wall Street Journal in August provided a clear glimpse to some of the financial woes that the electric car company continues to grapple with. In the report, it emerged that Original Equipment Suppliers Association believed the automaker posted a significant financial risk to their businesses.

Some of the suppliers alleged that they had gone for months without receiving payments from the car maker. Tesla immediately refuted the claims insisting that it had strong partnerships with suppliers. It went on to suggest that more new supplier had already expressed interest in supplying some of the parts.

Surging Short Selling Pressure

The developments have only gone to attract short sellers to the Tesla stock. Short interest pressure currently hovers at around 26%, an indication of waning investors’ confidence. The stock, although had a strong move higher, is still hovering near 18 months low in what has turned out to be one of the worst performances in recent years.

Musk has already reacted to the soaring short selling pressure by placing part of the blame on the SEC. According to the executive, the SEC is purely a ‘Shortseller Enrichment Commission.’ The executive has also taken a swipe at Billionaire David Einhorn over his remarks comparing the electric company to the failed Lehman Brothers Holdings.

The back and forth backlash have all but continued to pile pressure on Tesla as investors remain wary of the company’s long-term prospects. However, Musk has sought to dispel the concerns and fear about Tesla long-term prospects. In what is seen as an attempt to strengthen investor confidence the executive says he will buy $20 million worth of common stock.

Amidst the $20 million stock purchase push, Tesla remains in a precarious position. The stock’s sentiments in the market have taken a significant hit amidst the ongoing tussle with regulators as well as Musk’s outbursts.

Bottom Line

The stock is already down for the year as short sellers appear to be gaining control. For the stock to bounce back, from the current lows, then the company will have to serve groundbreaking catalysts.  Beating estimates on production as well as car deliveries would go a long way in revitalizing investor’s sentiments. The company also needs to turn in some profit to shrug off cash burn rate concerns.