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Wondering what the shorts will say?

Wondering what the shorts will say?

Wonder no more. Good ole Anton Wahlman has weighed in. Rather, he stuck his foot in his mouth yet again. What he does in this "analysis" is to compare 3Q 2019 to 3Q 2018. You can bet he'll do it again in January. Never mind the news that G3 is going on line momentarily, that MY will start rolling off the assembly line next year and start picking up steam next Summer. Or that the long awaited Tesla Cybertruck debuts in about a month. Or that the company is finalizing G4's location in Europe, the site will be announced soon. Or that Tesla made impressive strides in reducing production costs @ Fremont. Nah, none of that matters. What matters is TSLA did not beat the 2nd best quarter in its history Y over Y in profit -- conveniently forgetting that during the last months that the $7,500 tax credit would be available or that Tesla was rushing to fill backorders dating back two years. Or that the M3 is now around the #6 selling luxury car of any kind in the USA. He actually put up a post a few days ago pointing out that September deliveries were 97% lower in Norway than in April proving M3 demand is petering out; never mind here that anyone who knows anything about Tesla understands that the last month of a quarter that most all deliveries are shifted to the U.S. in the quarterly crunch. Or that Tesla delivered more cars in Q319 than ever before. That Tesla's sales are up 65% this year while the rest of the industry's sales are DECLINING. (The only negative for Tesla is that MS/MX sales are down a bit and we all know the why there).

This guy makes Nietsche a Pollyanna in comparison.

Oh, and this guy proudly announces he's short TSLA and long Ford. Say what? Snicker, snicker.

"Summary
One famous company just reported negative growth on a year-over-year basis, September 2019 quarter vs. September 2018.

Revenue was down 6%, gross profit down 22%, operating income down 37%, and net income attributable to shareholders down 54%.

You would think this was Blockbuster video rental or a funeral home losing business to cremations, right?

You would be wrong. It’s Tesla.

And because the margin expectations were even lower, the immediate stock reaction was up 20%. But that does set the bar so much higher for Q4 and Q1.

This idea was discussed in more depth with members of my private investing community, Auto/Mobility Investors. Get started today »

NOTE: A version of this article was first published on Oct. 23, 2019, on my Seeking Alpha Marketplace site.

One publicly traded company just reported a set of September 2019 quarter financials that were down on all relevant metrics, compared to one year prior (September 2018):

Revenue: Down 6%

Gross Profit: Down 22%

Operating Income: Down 37%

Net income: Down 54%

(That's net income attributable to stockholders, the most bottom of lines.)

So, on every conceivable metric, this company is shrinking revenue and profits. Whatever it is, it's not a growth company. Can you imagine the reaction to any other company with these year-over-year declines?

These negative growth rates up and down the income statement are perhaps what you would expect from Blockbuster video rentals or a funeral home in a world in which more and more people are cremated.

Adding insult to injury, of the $143 million in net profit, $107 million were government subsidies ("Regulatory Credits"). Talk about having almost all of your tiny and shrinking profit being dependent on politicians taxing your fellow man in order to pick winners and losers!

Yet, when these catastrophic year-over-year financials were reported, the immediate reaction of the stock was to rise 20%. The company in question is of course Tesla (TSLA) and the financials can be found printed onto the company's income statement filed at Investors Overview | Tesla, Inc.

So how come a 6% revenue decline and net income decline of 54% resulted in an immediate 20% stock jump? Shouldn't it have been the other way around?

No, not in this case. In this particular case, a rise in stock price was exactly what should have been expected for these results. Why?

Because the Wall Street expectations were even lower, that's why. In particular, below the revenue line. The 6% revenue decline was approximately in line with consensus. The $143 million profit was not. The Street was expecting a loss. Flipping a modest loss to a tiny $143 million profit, in part helped by a $107 million government subsidy ("regulatory credit") changed the whole game, at least in the short term, as far as the stock was concerned.

As you can see in the table above, there are no meaningful positive trends almost anywhere in the income statement. Yes, other income was up, and the opex lines came down more than revenue, but that didn't help the net results below the line.

Implications for the next two quarters

The positive reaction to the Q3 numbers sets the bar higher for Q4 and Q1. Investors will soon see in the 10-Q filing some of the methods by which the margins weren't as bad as the street consensus had indicated. Especially without a return to growth in Q4, if that is what happens, it will be all that much more difficult to repeat this immediate stock reaction next quarter, as well as the one after that.

Here's the link if you want to see Anton show his keister in all its glory. https://seekingalpha.com/article/4298583-going-believe-teslas-negative-g...

dmm1240 | 25/10/2019

BTW, Anton makes Baghdad Bob look like a pillar of truth and insightful analysis. As comics used to say about other comics they thought particularly funny: This guy slays me. I love reading his stuff for the giggles.

blue adept | 25/10/2019

Some people are just so damn pathetic.

dmm1240 | 25/10/2019

@blue adept. Yep.

Tesla stock is up over $20 today alone after nearly a $50 gain yesterday. Ole Anton is in a world of hurt right now.

andy.connor.e | 25/10/2019

I think i gotta get in on this so Tesla can help me pay for my Tesla.

SamO | 25/10/2019

“Wondering what the shorts will say?”

It burns. Please, dear God, make it stop.

Tesla2018 | 25/10/2019

Make sure that you put in an order to sell your stock for some crazy price with an expiration date about 6 months in the future. Someone mentioned a few months ago that brokerage houses can use the shares they are holding in your name to sell to people that need to buy in order to cover shorts. If you have a sale pending at a possible future date, then they cant use it and the shorters will have to pay more since less shares are available.

tew ms us | 25/10/2019

There's something to be said for letting shorts borrow your stock - especially if you think (as I do) that Tesla is going much higher. From a short's point of view, not being able to borrow stock is much better than a margin call.

blue adept | 25/10/2019

@dmm1240

I understand that some people are into 'feet' and this Wahlman character seems to be one of then since he seems to constantly get his foot stuck in his mouth time and time again.

It'll really piss him off when he learns that the stock got another bump from the announcement that Musk now has a ready-to-deploy solar roof:

https://electrek.co/2019/10/23/tesla-solar-roof-v3-launch/

It's happening....

blue adept | 25/10/2019

@andy.connor.e

Now you're thinking!

andy.connor.e | 25/10/2019

just reserved the solar roof.

blue adept | 25/10/2019

Again, welcome the the Resistance!

( ͡° ͜ʖ ͡°)

TabascoGuy | 26/10/2019

"If you are listening to this message..."

Tesla-David | 26/10/2019

This has been an incredible week for Tesla. I couldn't be happier to see how things are going for this incredible company and its visionary CEO, EM. The Tesla Mission is succeeding! I have been long on TSLA since IPO and have earned enough to easily buy multiple cars. ;0)

Congratulations @Andy on your Tesla solar roof order. I am excited for you.

dchuck | 26/10/2019

My favorite quote came from a user called QuornSyrup on Reddit..

I felt a great disturbance in the Market, as if millions of Tesla Shorts suddenly cried out in terror and were suddenly silenced...

jimglas | 27/10/2019

thats a good one dchuck

TabascoGuy | 27/10/2019

I was thinking more along the line that it's Judgement Day for the shorts but I like your quote better dchuck.

andy | 27/10/2019

In the UK most people don't really do stocks and shares other than indirectly through managed savings funds and pensions. For that reason I don't really understand shorts (although I'm aware of speculation of people shorting currencies).

This forum seems to refer a lot to people shorting and I also read of people who short also thinking that the company they short has no future. Can somebody explain why somebody who thinks a business has no future also buy stares, albeit at a predicted lower future price? Surely the shares have to have some value in the future for even people who short to not lose their money completely? It seems very counter intuitive.

[As an aside, given that Tesla currently have no real competition as a manufacturer of electric cars that can truly replace an ICE under all distance conditions, and also offer a better driving experience than ICE cars, then I believe the company has a strong future.]

TranzNDance | 27/10/2019

There are a lot of people who stand to lose if Tesla wins, so they will fight (dirty) to stop Tesla. It's too bad that that group is richer than the people who stand to win when EV replace ICEV.

andy | 27/10/2019

Everybody wins in the long term when EVs replace ICEs. It’s just that some people haven’t realised that.

Money isn’t everything.

TeslaTap.com | 27/10/2019

@andy - Here's my rough understanding of the way shorts work. The shorter buys a right to purchase the stock in the future, perhaps 6 months or a year, but don't actually own the stock. The cost of the right to do this is far less than the actual stock value.

They hope the stock goes down in value, as they can then close out the short position and make a tidy profit. The maximum upside for a successful shorter is a total failure of the company. This can be many times the investment, so the returns can be fantastic. It's easy to see a 100% or more return on investment.

On the other hand, the downside is also very risky if the stock goes up in value, they are forced to buy the stock at a higher price. What makes the upside very dangerous is people may not want to sell, so the act of trying to cover large short positions often further increases the stock value. The losses can be way more than the amount paid for the short position. There is no real limit to the downside either.

It's a huge gamble, but you can game the system sometimes by trying every way you can to make the shorted company fail. Amazingly all of this is legal. To me, shorters shouldn't be allowed, as the best outcome for them is to destroy companies. Not what we really want in society.

TabascoGuy | 27/10/2019

The puzzling part of it to me is that it isn't legal to manipulate the price of a stock up but it seems like it's perfectly OK to manipulate it down.

dmm1240 | 27/10/2019

@any What TeslaTap said, with a few additions.

Suppose you see a company that you think is in or headed for trouble. The thesis on Tesla by this crowd is: "EVs will never replace ICE cars. They're too expensive and can't be sold at a profit. Tesla's products appeal to a very small segment of the public and when they sell cars to all those tree hugging dolts, sales will tank. The company will start running deeper and deeper into the red eventually going bankwupt after banks refuse to lend Tesla more money to operate." They see this and think the stock is overvalued because it's considered a growth company so they decide to short it.

Here's how shorting works. In the old days, when you bought a stock you received a certificate indicating you as the owner on paper of X shares of Easy Peasy Inc. That doesn't happen any more. Nowadays, you're credited with owning X shares of stock on your account at a brokerage house. Many stockholders play the long game meaning they hold on to the share expecting the price and/or dividends to go up over time. They expect the stock to succeed.

What a short does is the opposite. (S)he thinks the price will fall. So what they do is to "borrow" shares. I won't get into put/call options and how they work to keep it simple. What the short does is to "borrow" shares from the brokerage house that actually belong to someone else and sell them at what they think is a high price. In return, the short seller pays the brokerage house/owner a small percentage for the loan of the shares. They must make good by returning the shares to the original owner by a set date in the future, usually 3 or 6 months, sometimes longer. When that date arrives the short must return the shares by purchasing them on the open market. The original owner then gets his shares back. (S)he makes a nice little profit and so does the brokerage house. If the price for Tesla stock has fallen in the meantime, the short buys the 100 shares, say, at the lower price and pockets the difference between what he sold the shares at to what he paid to purchase them them.

This works fine unless the price of the shares has spiked by the date the contract expires. Then the short has big problems. Suppose Tesla was selling at $300 when the short took out the contract meaning he sold, suppose 100 shares $300x100 = $30,000. Leaving out interest paid for simplicity's sake, suppose the closing date arrives and Tesla is selling @ $200 a share. The short pockets the $10,000 difference minus interest charges. OTOH, what happens if the price for TSLA increases, say to $500 a share. The short now has to return the 100 shares and the only way to get them is to buy 100 shares @ $500 a share. That means he has to fork out $50,000 to make good, a $20,000 loss plus interest paid to make good.

When we talk about FUD, what we mean is big time traders, mostly at hedge funds, who are short on a LOT of Tesla shares, desperately don't want the price to go up. To try and head this off, they play games with the facts. You constantly see them on CNBC, Bloomberg, etc and handing out interviews to the Wall St Journal and so forth coming up with reasons why TSLA is overvalued. Some examples:
1. "They'll never be able to make the Model 3 in volume."
2. "The build quality of Tesla cars sucks."
3. "Musk is erratic and half crazy. Would you want to invest in a company that's run by a maniac?"
4. "Tesla will never be able to turn out cars that they can sell for a profit. EVs are too expensive for the public to want them."
5. "Tesla may have been first and they'r benefitting from that, but when the big boys get serious about making EVs that are better than the junk ones Tesla sells it will be lights out in Fremont, California."
6. "Tesla will never ever make a profit."

They've come up with a dozens of these critiques and hawk them to dumbs talking heads on the financial channels constantly. Their intent is to kill Tesla before their contracts expire and they have to return all those shares. In Tesla's case, we're talking billions of dollars. All stocks are shorted some, but Tesla is among the leaders in this department. The float is the number of Tesla shares that are out there. Most are held by long term investors like most on this forum who have no intention of selling. They hold on when the price goes down and smile bigly when it goes up. They're not selling at any price until Tesla hits what some analysts think will be $4,000 a share within the next 10 years, if even then.

So, the 3rd Quarter results were announced and Tesla had nothing but good news to share. Unit sales are up. The company has managed to cut costs to the point that it made a profit despite the actual dollar number being down around $200 million compared the the 3rd Quarter of 2018. (The reason is the M3 has been so successful that it's cannibalized sales of the Model S (mostly) and these cars are more profitable per unit than the lower priced Model 3. Musk also announced that all the features for full self driving will be released by the end of this year. That is important because Tesla has been collecting fees for FSD for 3 years or so, but those funds are held in escrow until Tesla actually delivers what the purchaser paid for. When FSD is real, as it soon will be, Tesla will be able to pocket all that money held in escrow. Tesla also announced Gigafactory 3 is waiting on nothing more than Chinese government approval to crank up the Shanghai facility to start selling M3s in the biggest EV market in the world @ around a $20,000 lower price tag than they do now because they have to import cars made at Fremont. On top of all that, Tesla's energy business has turned around and is once again showing growth. Plus, the Model Y will start production 3-6 months sooner than anyone thought possible.

The stock spiked ~$50 in one day, and another $20+ the next day when the FSD news was announced. The shorts were caught flat footed. If the stock keeps climbing, they will be scrambling to cover -- to buy back the number of shares they need to "cover" the short bets they made. The more the price goes up, the more desperate they become which will increase the price of the stock even faster. In a big short squeeze, a stock's price can double, triple or better in a short amount of time. After the peak, when the shorts finally cover, the price usually comes down quite a bit but settles at a much higher price than when the squeeze began.

Is this the big squeeze? Hard to tell. It's definitely a moderate one, but I expect a giant squeeze would occur in January if the 4th quarter turns out to be even better than the third.

There is one fly in the ointment. We're about to enter a bear market. Red lights are flashing all over the world that the global economic expansion is about to end and recession is nigh. When the tipping point will come is anyone's guess, but it's coming. If the world tips over into recession it will be indicated by a bear market meaning stock prices overall are in decline. Many pros warn that this recession will be a bad one. If that happens, Tesla like everyone else, will be subject to the laws of gravity. Recessions make people stop spending, they lose jobs, financial difficulties abound all over. They might put off buying that Tesla for a year or two meaning Tesla's sales would go down despite all the good things the company's doing.

All that is what we have to watch for. Long term stock owners don't care, they'll just ride it out. Others may try to guess when and how much a recession affects TSLA, all stocks for that matter, but you're gambling there.

In any event, the shorts are in for a bad time and the lying SOBs deserve it.

andy | 27/10/2019

Can see you out a lot of work into that and there was a lot of info about the way that shorting works that I hadn’t heard before. Thanks.

NKYTA | 27/10/2019

@dmm, on your list you forgot:
7. “Tesla is burning cash.”

Nevermind that they are a growth company *investing* their cash.

Otherwise I think you and TT covered most of it.

blue adept | 27/10/2019

@TabascoGuy

I was thinking more Star Wars than Terminator, @dchuck knows what I'm talking about.

+1

blue adept | 27/10/2019

@TeslaTap.com & @dmm1240

Great work both of you, @TT for the layman's term summary and @dmm for the thorough, lay-speak explanation.

+100

richardburke66 | 28/10/2019

Nice post

Tesla-David | 28/10/2019

Yes, nice post, thanks @dmm1240 and @TeslaTap

BuffaloBillsFan | 28/10/2019

@dmm1240,

+10,000! I am not sure if this isn’t the best post I have read on this board ever. Very educational and easy to understand.

FTR I am long on Tesla and was expecting the price to drop so that I could convince my financial guy to let me buy another 100 shares or so. For now, I will hold off and see what Q4 brings. If the price stabilizes at ~$300 for a month, I might still buy another 100 shares anyway . . .

FTR, my financial adviser is not a huge believer in Tesla, but he has told me he is OK with investing in Tesla as long as I am prepared to lose it all. The obvious answer there for me was “Yes!” The stock is very volatile, and I wouldn’t be surprised if it dropped again in the near future, but my guess is I won’t be buying at $179 again for a while . . .

TeslaTap.com | 28/10/2019

@dmm1240 - Thanks! Your answer has far more than a few additions over mine and clearly a more in-depth answer :)

owlegrad2 | 28/10/2019

Yes thank you for the thoughtful explanation. I don't think I will ever fully understand the concept of how shorting works mechanistically but I feel like I have a better grasp now than I did before so thanks again for that.