Tesla: Burry’s next big short
- Michael Burrys Scion Asset Management has purchased 800,000 Tesla put options valued at $ 534 million
- The electric vehicle giant faces two challenges for its long-term success: Questions about its environmental friendliness and the legitimacy of its driverless vehicle claims
When Michael Burry – famous for profiting from the 2008 subprime mortgage crisis – makes a big phone call, investors tend to listen. Especially when he’s selling something empty. For this reason, the markets are chattering after the publication of the latest quarterly filing of its hedge fund with the US Securities and Exchange Commission: Scion Asset Management bought put options on 800,100 Tesla (USA: TSLA) stocks valued at over half a billion dollars.
Scion’s Tesla shorts shouldn’t come as a surprise – Burry has long voiced his discomfort with how the company makes money and is run. But the size of the position is interesting. At $ 534 million (£ 377 million), the Tesla put options are Scion’s largest single holding and account for around 40 percent of the fund’s portfolio.
Burry isn’t the first hedge fund manager to sell Tesla short. Electric vehicle (EV) maker stocks have been repeatedly on the wrong side of industry demand over the past few years – and fund managers have paid dearly for their negativity. According to S3 Partners, Tesla’s soaring share price cost short sellers over $ 38 billion in 2020.
But this time it could be different. Burry pulled out his put options at a time when Tesla is facing two fundamental challenges to its enduring success – questions about its green credentials and the legitimacy of its driverless vehicle claims. Either of these could pose problems that even Elon Musk’s fame cannot explain. Add this to the general unease in the market, which has increased since inflation fears began in the US, and there are reasons to believe that short might be the best position for Tesla investors.
Carbon credits: not a legitimate business model
Tesla’s battery efficiency has taken the world by storm. At a time when global governments are setting ambitious climate targets, the average lifetime emissions of a grid-charged U.S. Tesla Model 3 manufactured at the company’s Fremont facility in California look very attractive. According to the company’s 2019 Impact Report, Model 3s produce around 180 grams (g) of carbon dioxide (CO)2) per mile in the US, while the average premium midsize internal combustion engine produces just under 500g per mile.
For car enthusiasts who want to protect the planet without compromising on style, the Model 3 is a great choice. In 2020, Tesla sold around 455,000 of these cars, up from 442,500 the previous year, thanks to strong demand in the UK, US, Germany and China. The more conspicuous Model S, which accelerates from 0 to 60 miles per hour faster than a Porsche 911, is also very popular in these markets.
But Tesla’s Asian expansion is blurring its green cards. A little more than a fifth of the company’s sales in 2020 came from China, where electricity is still largely powered by coal. This means that a Model 3 made in the new Gigafactory in Shanghai and sold in China is nowhere near as environmentally friendly as its US counterpart.
Add this to the excitement surrounding Tesla’s $ 1.5 billion investment in Bitcoin, and it’s no wonder the green energy references that have boosted the company’s popularity with investors are being questioned. Estimates vary, but according to cryptocurrency expert Danny Bradbury, 72 terawatts (TW) of power are required to mine one bitcoin. Assuming that Tesla’s $ 1.5 billion investment bought 40,000 bitcoins in January, the mining effort consumed nearly 3 million TW of electricity – a terrifying statistic in the context of Elon Musk’s green energy efforts. At Tesla’s “Battery Day” last September, Musk said his company intends to produce a battery capacity of 3 TW hours (TWh) by 2030.
But it’s not Tesla’s dwindling green focus that worries Burry; This is how the company makes money with it. Last year, $ 1.58 billion of Tesla’s $ 31.5 billion in revenue came from the sale of carbon credits to other vehicle manufacturers. These loans are given to companies that fall short of their carbon emissions targets for the year and can be sold to their gas guzzling colleagues at a 100 percent profit margin. Tesla’s loans therefore contributed a large chunk to the operating profit of $ 2 billion in 2020, and the company would not have made legal net income without them.
The longevity of those loan sales is now being questioned as Tesla’s competitors accelerate the pace of EV manufacturing. Volkswagen (VOW3), for example, launched a new fleet of electric vehicles in 2020 that Tesla is already surpassing in Europe’s greenest markets.
For Tesla, Europe has been a reassuring source of emission allowance sales thanks to strict emissions regulations that mean that the average emissions from new vehicle fleets of automakers in the EU should not exceed 95g of CO2 per kilometer. But it’s getting less and less attractive. Rivals including ford (USA: F) and Volvo have teamed up to meet these climate goals. With the merger of Fiat Chrysler with Peugeot’s emissions-compliant owner PSA, Tesla no longer has to rely on support.
Richard Palmer, the newly formed group’s chief financial officer, known as Stellantis (USA: STLA) recently announced that about two-thirds of Fiat Chrysler’s EUR 300 million (£ 260 million) loan spending in 2020 went to Tesla in Europe. That means it accounted for around 16 percent of Tesla’s emissions allowance revenue last year. Without this contribution, Tesla’s numbers for 2021 might not be as attractive.
Automobile Profits: Delusions
Tesla’s second big investment hook lies in automation. Musk – and other Tesla cops – believe the autonomous capabilities of future Tesla software will help justify the company’s exorbitant valuation, since the technology can (so they claim) be sold for pure profit.
When the company released its annual results in January, Musk bragged about the profitable capacity of driverless cars and envisioned a world where Tesla robotic axles spend much more time on the road.
“[L]We just assume the car is twice as useful, ”he said of fully autonomous vehicles. “[I]If you’ve made $ 50 billion worth of cars, it means you are basically making an additional $ 50 billion in profit because it’s all software. “
Tesla vehicle sales are projected to grow more than 50 percent annually through 2025, when Musk forecasts annual production of 20 million vehicles. At this point, software upgrades could be available to turn these cars into robotic axes, gradually increasing the company’s earning capacity.
But these predictions are nothing more than a pipe dream. Automation doesn’t double the value of a Tesla. Car sales prices are seldom determined by how often they are used, and even established software is not 100 percent sold. It’s also hard to believe that Tesla’s driverless technology – the role of which is currently being investigated in a fatal accident in Texas – will be operational in the robot axis by 2025. With safety advocates campaigning for more stringent federal standards for driverless technology in the U.S., regulation could still overturn Tesla’s autonomous ambitions.
And that without taking the competition into account. Alphabet’s (USA: togetL) Waymo has 20 billion hours of real and virtual driverless miles and has partnerships with many automakers. Apple (USA: AAPL) is also reportedly working on its own driverless vehicle that could run on a battery developed by Apple. In December, Adam Jonas of Morgan Stanley said, “Apple’s potential entry into automobiles is perhaps the most credible / formidable bear case for Tesla’s stock for investors to consider in a while.”
The big short
At $ 604, Tesla’s stock price is far from its January high, but a valuation of $ 584 billion is always for a company that has so far made a profit only thanks to sales of regulatory loans by national governments still ridiculous. At the time of writing, investors consider Tesla to be more valuable than Ford. General Motors (USA: GM), Nissan (JP: 7201), Toyota (JP: 7203) and Volkswagen together. In 2020, these five automakers sold 46 million vehicles while Tesla sold just under 500,000.
And even taking net debt into account, Tesla’s rating compared to its peers is inexplicable. The company’s enterprise value is 11.6 times its forecasted sales and 115 times the number of vehicles sold in 2020. While other automakers can’t keep up with the growth, with increased competition in both EV and autonomous sectors, Tesla is unlikely to dominate the future auto industry as many investors have so far expected. The margins – powered by software and battery technology – could be better than the industry average, although they don’t get anywhere near the numbers Musk devised.
Tesla’s rating dwarfs its competitors
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But Tesla’s enigmatic CEO remains the greatest threat to Burry’s big short. Musk has a knack for moving his company’s stock price, which has historically been a problem for short sellers who don’t have the capital to cover a spike. The next few months should be an interesting drive for Scion Asset Management – one day it might be worth making a film out of the story.