Tesla – Downside risks have doubled

Tesla stock is down about 25% from our call to short the company at the start of the year, but although some bulls may be tempted to buy the dip we think the stock has much further to fall as the company is now vulnerable to twice as many dangers.

Competition heating up

As we noted in our earlier piece competition against the brand is starting to heat up with Ford Mach-e making the most serious inroads. CNN reports that TSLA market share has declined from a monopoly like 81% in February 2020 to to just 69% in February 2021. Those numbers will only get worse as many ICE manufacturers bring out models of their own.

Delay in truck production

Tesla production delays are legendary and its rollout of its trucking product is likely to be delayed by 6 months. Meanwhile competitors will likely flood the market with an array of models that will take market share away. As we noted earlier trucking the true breakout product in EV segment and Rivian Ford and GM all in late stages of production the consumer will have surfeit of choice eroding TSLA’s market leadership status.

Bitcoin is a double edged sword

In late January TSLA bought about 1.5 Billion of Bitcoin and the ensuing rally in the crypto asset quickly made the company a paper profit of nearly 1 Billion dollars. This was bigger than the company’s profits from EV sales in 2020 turning TSLA effectively into a crypto hedge fund rather than an EV car maker. While investors cheered the move initially the stock price did not respond as markets fully understand that Bitcoin is two edged sword. The asset has lost nearly 80% of its value at least three times in its lifespan and there is no reason why a profit taking selloff in the asset could not take Bitcoin down to 25,000 by mid year. That would turn TSLA’s paper gain of 1 Billion into a paper loss of about the same size. More importantly it could create a cash crunch in the perennially cash strapped company just at the time as the market may not be amenable to yet another secondary offering of stock.

Tesla also created a stir with its announcement that it will accept Bitcoin as payment for automobiles, but a careful reading of its term reveals that the company will not assume any volatility risk in the transaction and will offer refunds either in cash or bitcoin depending on which price is more favorable to the company rather than the consumer. This is standard fare for TSLA given the company’s long history of predatory tactics but may backfire badly from a PR point of view if many Bitcoin based buyers only receive half the money they paid for the vehicle. 

Growth is slowing

The bottom line for TSLA is the growth in the demand for its product is slowing. The company remains the preeminent brand in the EV space, but the segment itself is about to go mainstream and will be subject to vicious competition that will weigh heavily on profit margins. At the same time competitors may be first to market with EV trucks which promises to be the most desirable segment of the market and could quickly match and perhaps even beat TSLA’s offering.

With competition heating up, its balance sheet exposed to Bitcoin and possible product delays the TSLA trade remains a short.