Executive Edge

Why Tesla is such a battleground stock

Key Points
  • Tesla has risen from an IPO price of $17 per share in 2010 to around $235, but it has been a volatile ride.
  • Elon Musk's electric-vehicle and solar energy company reflects many of the stock market and economy's biggest battle lines.
  • Tesla reported a bigger loss than expected on Wednesday, and investors are keyed in on slowing demand and diminishing cash on the balance sheet, but many Tesla battle lines go beyond finances.
Tesla's Elon Musk must file update with court in SEC case
Tesla's Elon Musk must file update with court in SEC case

Tesla's electric-vehicle, solar energy and battery-storage businesses tick off big sustainability themes in the era of climate change. That has attracted a passionate base of consumers, as well as social media supporters. Elon Musk has 25 million followers on Twitter.

Tesla also fits the ESG (environmental, social and governance) approach to stock market buying now in favor with a new generation of investors.

"If we're talking about the 'E' here, there is enormous upside potential in cost savings, the prospect of regulatory changes and, most of all, the biggest group of consumers (and ultimately investors) ever — millennials — whose priorities are very ESG-related. All of those things make Tesla (Musk's issues aside) an appealing prospect," said one institutional investor.

But that institutional investor no longer owns Tesla. They sold because Musk's leadership wasn't delivering on the G — the governance part of the ESG philosophy.

Since just about one year ago, the Tesla CEO has called a Wall Street analyst "bonehead" (May 2018); had a random Twitter feud with a diver that took part in the Thai cave rescue (July 2018); and, most recently, has been involved in a legal battle with the Securities and Exchange Commission stemming from his August 2018 tweet about a deal to take the company private, a deal that never materialized. Things got so ugly with the SEC — which could ask for Musk to be removed from management — that a federal judge recently asked the two parties to put on their "reasonableness pants" and reach an agreement.

Elon Musk, chief executive officer of Tesla Inc., waves while departing from federal court in New York, U.S., on Thursday, April 4, 2019.
Natan Dvir | Bloomberg | Getty Images

There are signs that Musk's outbursts during a critical period for the company could be scaring off some of the biggest fund managers. Reuters recently reported that one of the top institutional fund holders, T. Rowe Price, had made large cuts in Tesla shares it held across several of its funds.

"He is a huge focus of Tesla fanatics on the bull side," said Dan Ives, managing director of equity research at Wedbush Securities. "It's the passion for EVs and what Tesla has built, and enthusiasts who believe this is a company that will change consumer society."

But that kind of support can be dangerous for stock market investors, who cannot afford to be emotional when their money is at stake.

This is the most emotional bull-bear battleground stock I have ever covered.
Dan Ives
managing director, Wedbush Securities

The middle ground is not a very popular place to be when it comes to Tesla.

"I have covered tech for two decades, so many different names, shapes and sizes, but this is the most emotional bull-bear battleground stock I have ever covered," said Ives.

One of the company's earliest officials, two-time CFO Deepak Ahuja — who retired for the second time in 2018 after coming back to help the company through one of its many difficult financial stretches — has suggested that from day one controversy was inevitable.

"There has been no [new] successful American car company in 100 years, and then to make it an electric-car company in California that is vertically integrated in its manufacturing and wants to challenge the dealership network and do its own sales and service — that's an incredibly hard thing to take on," said Ahuja in a speech after his first retirement. "All your dirty laundry is out in the public. Tesla is especially the kind of company people either love to love or love to hate."

Said Ives, "It hits on disruptive technology, autos and oil."

The links between Tesla and First Solar

For ESG investors it can be difficult to understand how a stock designed to create a better future can be on the receiving end of so much negativity. The brief history of renewable-energy stocks shows this shouldn't be a surprise. Volatility has proved to be endemic to renewable-energy investing.

Consider one of the first big renewable-energy stocks in the U.S.: First Solar. It went public in 2006 at $20, rose as high as $300 within a few years, and then it traded down to as low as $11 by 2012 as bankruptcy fears rippled through the solar sector. Even after surviving a shakeout in the solar business, which involved declining government incentives around the world and increased, heavily funded competition from China (two factors that figure in Tesla's future), the volatile ride hasn't stopped for the solar leader. In the last two years, FSLR shares have been as low as $27 and as high as $80. It is trading around $60 this week.

"Bears have a very good memory of what happened with FSLR, and when you look at TSLA, there are some of the same characteristics," Ives said, though he stressed it requires painting both scenarios with broad brushstrokes.

These are new industries where "story stocks" can stoke enthusiasm from retail investors and many long-term investing asset-management firms are willing to be patient, to a point, through ups and downs in trading.

David Einhorn's Greenlight Capital made a bet against First Solar that paid off when the solar sector bottomed out in 2012. He recently slammed Tesla, saying in a letter to investors, "The wheels are falling off — literally."

Jim Chanos of Kynikos Associates, a short seller who has had some notable winning short bets, including Enron and First Solar, has been vocally negative on Musk and Tesla.

The Tesla bears are riding high

As of mid-April (before the first quarter earnings report on Wednesday), about 27% of Tesla's public float — the shares available to trade on the open market — were short the stock, according to mid-April market data. Short bets can run above 60% of available shares, but Tesla isn't a micro-cap stock like many of those companies. Even after a year-to-date decline of roughly 30%, Tesla is still a $40 billion company, though Ford passed it in market value on Friday — in April 2017 Tesla had surpassed Ford's market value for the first time. GM remains the biggest of the three, with a market value above $56 billion. Even after several recent rounds of layoffs, Tesla employs roughly 40,000 people.

"Most investors or analysts that cover autos, they almost have cororaries when they look at the valuation. Investors who are bullish are disruptive technology investors," Ives said before the Wednesday earnings. "The risks have increased over the past six months, and now we view it as a fork-in-the-road stock."

Investors who are enamored of the Tesla mission and are willing to overlook Musk's recent feuds need to remember that cash flow, profitability, manufacturing execution and market demand are the make-or-break issues for the company and its shareholders.

Tesla reported a bigger than expected loss in its first-quarter earnings on Wednesday after the bell, with deliveries of cars declining and its cash a continuing concern. For the first time in a while, Musk conceded the company may need to raise more capital. Tesla recently pay back close to $1 billion to holders of its debt.

"Right now the bears are having a field day," Ives said.

Before the earnings, he said, "This is not a stock that will be sitting at $260 at the end of the year. It will either be meaningfully higher or lower."

He had a $365 price target on Tesla before its first quarter earnings.

After the earnings, Ives went to neutral and a target of $275, saying there are too many outstanding questions about demand and cost structure for the long-term promise to outweigh the risks right now. He expected all along the company would need to raise more capital this year (Morgan Stanley estimated a $2.5 billion raise after the results). That will pressure shares in the short-term even though longer-term it should provide breathing room, Ives said before the results, but his tone was increasingly negative after earnings, writing in a note, "We view this quarter as one of top debacles we have ever seen while Musk & Co. in an episode out of the Twilight Zone act as if demand and profitability will magically return to the Tesla story."

Ives said the most bears have shifted from conspiracy theories — with drones flying over the gigafactory and Fremont, California, car plant, looking for signs the company won't even exist — to a focus on production and demand numbers that at times Tesla has been able to hit, which surprised even bears.

"This is the early stages of a massive market opportunity, and many investors are viewing the competition looming and think Tesla's best days are in the rear view," Ives said. "We disagree, but that makes it a prove-me story."

In his post-earnings note, Ives wrote, "We no longer can look investors in the eye and recommend buying this stock at current levels until Tesla starts to take its medicine and focus on reality around demand issues which is the core focus of investors."

The long-term backers have been rewarded

Despite short-term troubles, Tesla stock has done well since its 2010 IPO. At least to date, the chart has been much better to the early bulls than long-time bears.

The long-term Tesla bulls include a few top-performing managers who are concentrated in their ownership, billionaire mutual fund manager Ron Baron of Baron Capital Management, and Catherine Wood's at Ark Invest.

Some of their enthusiasm can seem extreme: Last year Wood called for a Tesla stock price of $4,000 by 2023.

But one thing these two managers share is strong performance. Baron is one of the few of the old breed of active mutual fund managers who over the long-term has still managed to perform well versus index funds. Wood's Ark Innovation ETF (ARKK), meanwhile, has the top ranking in its category over the past three-year period, according to Morningstar.

Wood stresses the disruptive technology view of Tesla and efforts like autonomous driving. On Monday, Musk made his most extended sales pitch for autonomous vehicles yet at an investor day, saying Teslas will be able to serve as robo-taxis for their owners by next year and owning any other car would be like owning a horse. Others on Wall Street have said the autonomous driving plans unveiled by the company are "half-baked."

Baron made a different disruptive argument for Tesla at one of his annual Baron shareholder meetings a few years ago. Tesla was at that time also facing concerns about its balance sheet, but Baron shrugged it off. He argued that being a traditional auto manufacturer was the dangerous balance sheet position because the massive manufacturing plants that these automakers own today will be worthless when the world goes full-throttle to EVs. Further, Baron argued that the car dealership model is another future financial sinkhole in the car industry. Some dealers agree.

Why legendary investor Ron Baron is betting big on Tesla
Why legendary investor Ron Baron is betting big on Tesla

Baron's bullish views about Tesla can help explain why some of the most consistently negative voices on Musk's company come from auto executives.

"Tesla has no ... tech advantage, no software advantage, no battery advantage. No advantages whatsoever," Bob Lutz, former vice chairman of General Motors, who also worked at BMW, Chrysler and Ford, told CNBC.

In 2017 Lutz said Tesla is a "losing enterprise" that won't last. "The company, folks, is going out of business. At this rate they'll never get to 2019."

Tesla's entire model is built around putting car dealerships out of business. In states across the country, Tesla has had to fight with lawmakers over the right to sell EVs without dealers being included.

Mike Jackson, former head of the nation's largest car dealership company AutoNation, has been a vocal critic of Tesla. He said by using "bait-and-switch" tactics on consumers, promising a $35,000 Model 3 years ago but delaying its introduction, Musk acted "almost unethically." Jackson does believe electric cars are here to stay and will grow considerably in the next decade, but said Tesla may not be in business 10 years from now. Jackson claims to have no beef with Tesla or Musk and points out AutoNation never challenged Tesla's distribution model that avoids dealers. He would even sell a Tesla if the company agreed to offer it through dealers.

Government incentives matter more than auto execs

Expiring government incentives are another focus for the bears. Current fears in the market are that the waning tax credits for EV buyers in the U.S. are behind declining Tesla sales and that will continue to be the trajectory. A Nikkei report on April 12 said that Panasonic and Tesla, partners on battery production at Tesla's Nevada gigafactory, were pulling back on expansion plans for this year, which reinforced fears that demand for Tesla cars will not rebound quickly.

At the end of last year, the $7,500 federal tax credits for buying a Tesla ended because the company reached a maximum number of cars sold that were eligible and fell to $3,750 at the beginning of 2019, and will be retired at the end of the year. A group of bipartisan senators has introduced a bill to extend those EV tax credits from 200,000 to 400,000 vehicles. The new bill dubbed the "Driving America Forward Act" would grant each automaker a $7,000 tax credit for an additional 400,000 vehicles.

After a recent Wall Street Journal editorial arguing that the loss of the tax incentives for electric vehicle purchases was a bigger issue than Tesla fans would accept, Musk took to Twitter to call the WSJ and the writer "sock puppets" of Big Oil.

New industries reliant on government support can face a double-edged sword. First Solar shares and shares across the solar sector boomed during a period of years when European Union countries, led by Germany, were offering large feed-in tariffs for the development of solar power projects. The incentives were required to stimulate demand, grow the industry and allows its manufacturing companies to develop cost-effective economies of scale. But the importance of the incentives also led to massive volatility in solar stocks, and played a role in bankruptcies.

Big Oil expects passenger-car EVs to rise

Big oil isn't in denial about EVs. If anything, passengers cars are the only part of the transportation industry where oil companies see rapid growth coming. The widely read long-term energy outlook from BP predicts that the share of oil within the transportation sector declines to around 85% by 2040, down from 94% currently. Natural gas, electricity and biofuels together account for more than half of the increase in energy used in transport, with each providing around 5% of transport demand by 2040.

BP does see greater growth for EVs, specifically. "The number of electric vehicles reaches around 350 million by 2040, of which around 300 million are passenger cars. This is equivalent to around 15% of all cars," BP wrote in the most recent update of this annual report.

The oil giant also predicts the emergence of autonomous cars (AVs) in the 2020s will result in around 25% of passenger vehicle miles traveled being powered by electricity in 2040.

More competition is entering the global EV market in regions where Tesla needs to find new demand. Last October, it was reported that Tesla's largest fund management shareholder, Baillee Gifford, was taking a stake in Chinese electric car company Nio.

Nio is one of several Chinese automakers with plans to make cars for the Chinese market initially, but it also has ambitions to expand into Europe and the U.S. The threat to Tesla is real as the Chinese market becomes increasingly important as a new source of demand for Musk's company. Tesla is now building a plant in China.

China's government ambitions, and support for renewable energy and manufacturing, are hugely influential on a global scale. The Chinese government and its massive lending apparatus was as responsible for the solar industry shakeout as any single factor. It funded the development of giant solar panel and solar cell manufacturing companies to soak up the incentives being offered across Europe when they were at a peak. Even as that strategy resulted in several of its own companies ending in bankruptcy, the Chinese solar industry remains huge today.