Time to Short Tesla? Valid Arguments Abound

Tesla ( $Tesla Motors(TSLA)$) was and continues to be a high-conviction stock. Even at a time when retail investor interest in the U.S. has been at net lows, institutional investors and tactical players such as hedge funds, et al, have been quite active in recent weeks in the markets. However, while the markets have been rising, the bulk of the movement was centred on 7 stocks – predominantly Big Tech – along with a few names either in or adjacent to the ongoing “AI Bubble”. There is some evidence of a sector rotation being attempted, but conviction hasn’t been strong enough to indicate there being a consensus on market recovery. The reason being is that macro indicators do not indicate an easing of the affordability crisis among the American consumer.

A key element of the Big Tech cluster – and often implied as being in the “AI Bubble” as well – is, of course, Tesla. All matters considered, the company has an uphill battle if America (its primary market by a wide margin) is in the midst of a spending downturn. However, as of June 8, the stock is up over 117% in the Year Till Date (YTD).

Overall, vehicle inventories in the U.S. have been plunging as manufacturers pull back on production to match vehicle/model demand.

On the other hand, Tesla’s total vehicle inventory has been edging upwards since the last week of May.

While this is nowhere close to the highs seen in January, this could be the beginning of a long-term trend that is entirely expected, given the affordability crisis. However, a breakdown of inventories by model reveals a very interesting trend.

While the inventories of the Model S and Model Y - which retail for around $90,000 and $52,000 respectively, have been low – the inventory of the Model X (which retails for around $100,000) has been showing a net decrease in recent times while that of the company’s cheapest model (Model 3; $40,000) has been piling up. This is a stark reminder of the affordability crisis: even the middle class is beginning to prioritize necessary purchase ever more now. A slew of articles penned over the past couple of days tout the fact that, with tax benefits, the price of a Tesla Model 3 is cheaper than a Toyota Camry. Such proclamations are rather interesting for two reasons. Firstly, several ardent “EV watchers” has long been touted that buying an electric car is an investment into technological innovation. Equating this to a decades-long stable of a popular Internal Combustion Engine-driven car indicates that this distinction has steadily been erased: an Electric Vehicle (EV) is de rigueur, not an innovation. Second, such a proclamation misses the point entirely that new car sales have been in decline in the U.S. for over a decade now.

Tesla has been held aloft predominantly by the spending habits of higher-income population segments that are (at least currently) more inured to the effects of the affordability crisis than the middle class or the working class segments. However, these segments are also extremely well-catered to a host of luxury carmakers – nearly all of whom offer EV options now.

As of the 8th of June, the Price to Earnings (PE) Ratio and the Price to Sales (PS) Ratio of major carmakers also indicate a number of dysfunctions:

While Ford and General Motors straddle either side of the Domestic Automotive Industry average for the PE Ratio, they fall far below the average in the PS Ratio. This is propped up by the PS Ratio of pure play EV carmakers such as Rivian, Lucid and Tesla. However, unlike Lucid and Rivian, Tesla’s PE Ratio is almost 7X that of the average while the other EV carmakers trend negative.

In contrast, German carmakers Volkswagen, Mercedes-Benz and BMW show a very strong relationship to both ratios relative to the Foreign Automotive Industry averages. In fact, even when considering Japanese carmakers Toyota and Honda as well as Chinese carmakers Geely and BYD, the relationship between their PS Ratios with the industry average remains quite reasonable. When considering PE Ratios, however, the Chinese carmakers are significantly more overvalued than the Japanese and both are significantly more overvalued than the Europeans.

Japanese carmakers tend to have a much stronger footprint in Emerging Markets (EM) economies, where the middle class is resilient and rising and a possibly-significant attribution for these stocks’ high PE valuation. The Chinese carmakers, on the other hand, benefit from strong investor interest in their stocks from overseas buyers – who often consider buying Chinese stocks to be sufficient for “diversification” purposes. While Chinese consumption has, of course, been on an upward trend, signs of strains are becoming increasingly apparent in Q2. Whether this continues or if the Chinese government steps in with sops to props up consumption is a matter of conjecture at the moment but is likely to happen.

On the matter of Tesla’s stock performance, it bears noting that the Put-Call Ratio on the stock in the US markets (as of June 8) also puts forth some rather interesting perspectives.

While the 10-day Put-Call Ratio is showing rather strong and persistent equivocation in the trajectory of the stock throughout June, the 30-day Ratio is showing a very strong (albeit somewhat relaxed) belief that stock will tumble soon.

While long-term professional investors exhibit an abundance of caution, media coverage seems to have had the opposite effect on the retail investor: the American Association of Individual Investors’ weekly Sentiment Survey, whose results were published on June 8, indicates that 44.5% of survey respondents are now bullish on the markets with 31.2% remaining neutral. The current percentage on “neutral” is close to the historical average while the bullish sentiment is nearly 7%.

While Tesla is certainly slightly better-positioned than other U.S. EV carmakers, no stock can exist in a vacuum. The “Big Tech” and “AI” Bubbles will pop; the only question is when.

It pays to stay hedged. Investors beware. For investors looking to make a play on the stock while retaining their current holdings, Exchange-Traded Products (ETPs) are available: for example $-3X TSLA(TS3S.UK)$ gives for a 3X leveraged position on the stock’s downside while $LEVSHARES -2X TESLA ETP(TS2S.UK)$ offers the same with 2X leverage.  

For articles on broader economic events that are tangential to tactical market movements, visit asianomics.substack.com. The latest article offers the fullness of the background behind the commentary I offered to Bloomberg this week.