Special Situation: I'm Shorting Tesla

This is certain to be the most controversial pick I’ve made in Asymmetric Investing. Whether you’re a fan of Elon Musk or not, I encourage you to read this with an open mind.

My opinions about Tesla’s position in the market and its valuation are born from an analysis of what’s happening on the ground, not what you see on social media. And the facts back up taking a negative view of Tesla’s stock based on both valuation, fundamentals, and “vibes”.

First of all, I need to explain what I’m looking for by starting this position.

In other words, this is a hedge on the market and valuations with some fundamentals backing it up. If this investment goes wrong, it’s likely the loss is more than offset by gains in the main Asymmetric Portfolio (which was up nearly enough on Tuesday to cover this trade).

I will also be using a long-dated put, or a LEAPS, to make this position. LEAPS have a known downside because you pay a price for the option to sell a stock at a future value.

In this case, Tesla’s stock is trading for $424.07 today (Tuesday night). I’m buying an option to sell the stock on January 15, 2027 (722 days from now) for $110 per share. The acquisition price for that option was $4.95 per share and options are in 100-share increments, so the total price to buy the option with Public’s rebate is $494.97 on a new account on Public.com. This is the cost basis I will track from.

The value of the option will go down if the stock goes up or as time elapses.

The value will go up if the stock falls and/or if the volatility of the stock or stock market increases — these two often happen in tandem — before the time value of the option evaporates.

This is a WAY out of the money option, but I think it’s appropriate in this case because Tesla’s stock has had 4 distinct drawdowns of over 50% since 2016 and the most recent in 2022 was 73.6%. I also intend to close the position with some time value left, but we will see how that plays out.

I will update the final numbers in this post online and in a special situation portion of the Asymmetric Portfolio.

Now, on with the thesis.

I’m going to start with Tesla’s operating structure because it’s important to this position.

Elon Musk essentially copied Apple’s functional business structure for Tesla, rather than building a business with divisions as was common in a world of conglomerates. In other words, there’s an engineering unit, but not “Model 3 Division”.

The functional structure does a couple of things:

Add all of this together and Elon Musk is the most important person at Tesla by a mile. He’s the head marketer. He’s the head designer. He’s the head engineer. When Elon Musk says jump, Tesla’s employees ask “How high?”

That’s a strength when Musk is pointing them in the right direction. But it’s a hindrance if they’re led astray.

I think right now Musk has led Tesla astray and the Tesla fanbase on social media and Wall Street has sent the stock higher even as cash flow falls. To be honest, if you look at Musk’s actions in Washington DC recently, he seems more focused on SpaceX and XAi than he is on Tesla, which isn’t what we want from a CEO.

From a valuation standpoint, Tesla’s valuation makes no sense. The market cap of Tesla today is $1.36 trillion and EV sales and FCF are falling.

A traditional automaker is trading for 0.3x sales, but Tesla trades for 13.8x sales. I know, “this isn’t just an auto company”, but I’ll outline why the company is still insanely expensive given its relatively weak position in autonomy, energy, and robotics. And with policy changes, it’s likely Tesla’s existing free cash flow could go negative as early as 2025. What is Tesla worth then?

I know I’m going against the conventional wisdom here, so I’ll break down the most common bullish narratives about Tesla one by one.

The EV market is growing globally and Tesla’s sales are falling. This is for a variety of reasons from the company’s stagnant designs to customers wanting more options and variety in their auto purchases.

I think one thing the tech industry, and by extension Elon Musk, misses in the auto business is that people want variety and differentiation. We all have the same phones in our pockets, but the phone doesn’t define us and the features on the phone can be personalized so it’s “mine”.

A car is different. When we drive a car down the street we want to tell a story about ourselves to the world. We want to say “I’m wealthy”, “I’m still young”, or “I care about the environment.”

Whatever our motivation, we want to be seen as unique to those observing us moving through the world.

Tesla has moved in the opposite direction, keeping its styling essentially constant since the Model S was launched in 2012.

We also have the supply/demand dynamic globally becoming normalized and Tesla has gone from the only company growing supply to just another supplier with very ordinary margins for an automaker. You can see the pandemic bump in margins and growth in 2021 and early 2022, but that didn’t last.

GM is gaining market, Ford is gaining share, VW has compelling products on the market, Rivian is expanding, and on and on.

Meanwhile, Tesla’s functional structure has shifted from focusing on auto production growth and quality to AI and FSD. This is both the opportunity and the cost of the functional structure.

And Musk doesn’t seem to care about making a real update to the Model 3 or Model Y, outside of the cosmetic changes that are rolling out. Instead, the focus is on the robotaxi and FSD, which I’ll get to below.

This will layer into the political dynamic I’ll talk about below, but today Tesla is more of a Chinese EV manufacturer than an American manufacturer.

I’m basing this on the following table, in which the source is noted. Other sources are largely in line with these figures and Troy updates the numbers as official sources are released, so I think this is a solid representation of incomplete data.

A couple of things stand out here.

These are problems for a couple of reasons.

If you’ve followed the wind or solar industry over the past 15 years, you know China doesn’t care about making money on the goods it manufactures, which is a detriment to U.S. manufacturers.

If Tesla is shrinking in the U.S., Canada, and Europe, where demand for EVs is collectively rising and auto demand overall is up, there’s a clear problem. And remember the EV drives everything else Tesla does.