Tesla short-sellers have been getting creamed, but they're still betting against Elon Musk anyway

Key Points
  • Elon Musk insists Tesla does not need or want to raise equity or new lines of credit this year, but Goldman Sachs predicts it will need to raise $10 billion by 2020.
  • Tesla short-sellers say the company should, but can't, raise the capital it needs to pay off debts, fund operations and thrive in the long term.
  • Bears also believe the electric car maker is too risky for large investment banks to underwrite billions.
Elon Musk 
Lucy Nicholson | Reuters

It's been a rough few weeks for investors betting against Tesla, one of the most-shorted stocks in the United States.

Tesla stock has rallied almost 17 percent since the company's early June annual shareholder meeting at which Chairman and CEO Elon Musk promised profitability in the third quarter. Shares kept trending higher this week, rising slightly after Tesla announced plans to lay off 9 percent of its workforce. Musk added $25 million worth of shares to his personal holdings.

Those with a positive outlook on the electric vehicle maker see Tesla's restructuring as a push for profitability. But the bears see the layoffs as yet another sign Tesla is in the middle of a cash crunch and believe it won't be able to raise the capital it needs to pay debts and fund operations.

Here's why:

Costly ambitions

Musk has maintained that Tesla does not need to raise equity or new lines of credit this year. But Goldman Sachs predicted Tesla will need to raise $10 billion by 2020 to keep going.

Darius Brawn, a hedge fund veteran who previously worked as a portfolio manager for SAC and Citadel, told CNBC he thinks $10 billion is a conservative estimate. He cites Tesla's plans to ramp up its Model 3 production, build new factories, make a new Roadster, Semi trucks and a Model Y vehicle, and to embark on large-scale production of its glass solar roof tiles.

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Brawn, who has shorted Tesla personally, points out that it's highly unusual for a growth company to cut its planned investment spending, as Tesla did last quarter from $3.4 billion to under $3 billion.

Tesla's accounts payable stood at $2.6 billion as of March 31.

Without raising additional capital, Brawn said, the electric vehicle maker has enough cash to last for only a few quarters. He bases his estimates on its expected cash flow from operations, stated capital expenditure plans and credit agreements.

Weak margins

Kynikos Associates founder Jim Chanos, who predicted the fall of Enron, is warning investors of overly optimistic company leaders out of Silicon Valley in general. When it comes to Tesla, the billionaire short-seller told CNBC this week:

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"The company is not profitable from operations. The company will ... do a lot of one-time items, we believe, to show a GAAP profit in the third quarter. But they are just that, one-time items. The basic problem is that [Musk] is making the cars at not enough of a gross margin to make money — and that's before the competition rolls out, which is late this year and early next year."

Too much risk for i-banks

Accipiter Capital Management general partner Gabe Hoffman, who became a hedge fund manager at Welch Capital at age 22, is one of the loudest Tesla shorts on Twitter. He calls the company "the greatest cult stock of all time."

While he said Tesla appeals to mom-and-pop investors enchanted by the Musk myth, he doesn't expect the largest investment banks to buy the same story. That could become a problem if Tesla needs to offer more shares.

"Underwriting securities is a risk for any investment bank. For example, the investment banks lost gobs of money on underwriting the Facebook IPO, based on all the fines and legal settlements they were forced to pay out, just because the IPO went a little bit wrong, for a relatively short period of time," Hoffman told CNBC.

"I do not believe Wall Street investment banks are willing take the massive reputational, legal and financial risks associated with underwriting billions of dollars of new securities for [Tesla]."

He and other bears also believe Tesla may not even be able to conduct an equity offering because of the existence of an undisclosed, and ongoing, enforcement action by the SEC. This action was discovered through FOIA research conducted and published by business intelligence firm Probes Reporter.

No lease for Model 3

On June 3, Musk told his nearly 22 million followers on Twitter that "leasing negatively affects Tesla cash flow," so the company won't offer that option any time soon for the Model 3.

tweet 1

But Brawn, Hoffman and other bears say leasing should be a no-brainer for the company and would help Tesla accomplish its mission of bringing EVs to the masses and generate near-term revenue.

If the company is so concerned about short-term cash flow dynamics, it should have already raised equity to create a cushion for normal business operations including a lease program, they say.

A Tesla Model 3 car is on display during the Auto China 2018 at China International Exhibition Center on April 25, 2018 in Beijing, China.
VCG/VCG | Getty Images

Why the bulls ignore these concerns

The most bullish analyst on Tesla today, Romit Shah of Nomura Instinet, told CNBC:

"In the shareholder meeting, Tesla was so incredibly confident about reaching their targets — 5,000 Model 3 cars per week, GAAP profitability in Q3 and Q4. I think that people do not realize they have a very savvy CFO who is creating a lot of flexibility with operating expenses and capital expenditures."

Shah said even if Tesla executives said they needed to raise capital this year, it makes sense for them to wait until Tesla is in a position of strength. The company's stock is still down almost 10 percent from a year ago.

"If you raise at $250 a share, the dilution to shareholders is more significant than if you do it at $450 a share," Shah said. "We believe they will be in a position of strength as the year progresses. So it makes sense to wait to raise equity."

Even Brawn acknowledges, "If they raise meaningful debt or equity, I will be proven incorrect. But it matters a great deal whether they can and do, because without additional capital, Tesla could really be bankrupt before too long."

Tesla declined to comment.

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