The incredible story of Tesla and its soaring share price

This week has seen a continuation of what has become quite an incredible story with various messages for our times. So without further ado let me hand you over to IG Index this morning .

Tesla $800 handle – Market cap now > $140bn

For those who do not follow this sort of thing the share price has passed US $800 which is a further advance on the US $780 close yesterday which itself was a rally of just under 20 per cent on the day. Extraordinary enough in its own way but even more so when we note that the low in the past year was US $176.99

Moving onto the concept of a market capitalisation there is always an issue in using a marginal price for a collective concept and this is even more true here as we note the surge. After all it has gone from around US $32 billion to over US $140 billion inside a year! That provides its own critique. Even more so when we see Tesla is mainly a car company at a time the overall industry is struggling. On that subject Charlie Bilello points out this.

Over the past week, Tesla’s market cap has increased by $40 billion (from $100 billion to $140 billion). For some perspective, Ford currently has a market cap of $35 billion.

A response to this illustrated part of the issue.

Ford’s a dying company bro. I literally do not know anyone who owns a Ford anymore.

😂

yet everyone I talk to is at least intrigued by getting a Tesla ( @RobTheBrave )

 

To which he replied.

Ford sold 2.4 million vehicles in 2019. Tesla sold 367 thousand.

The exchange illustrates another feature of this move which can be highlighted by quoting the Imagine Dragons.

You made me a, you made me a believer, believer
(Pain, pain)
You break me down, you build me up, believer, believer
(Pain)
Oh let the bullets fly, oh let them rain
My life, my love, my drive, it came from
(Pain)
You made me a, you made me a believer, believer

Much of the situation here is binary you either believe or do not and indeed it often feels like something George Michael sung about.

‘Cause I gotta have faith
I gotta’ have faith
Because I gotta have faith, faith, faith
I got to have faith, faith, faith

Tesla

If we switch to its situation there are pretty much as many questions around as there were when the share price was some US $600 lower. Here is FT Alphaville on the profit/loss situation.

Margins have also improved, with Tesla’s 2019 ebitda margin rising 1.5 percentage points year-on-year to 9.1 per cent, and even on a net income basis, Tesla has been posting GAAP profits. Although the margins themselves are not much to write home about, at just 2.3 per cent and 1.4 per cent for the last two quarters respectively.

Despite these positives, top-line growth from its automotive segment also came to standstill year-on-year, as lower asking prices counterbalanced its record deliveries of 367,656 cars.

So some improvement but roaring ahead does not usually come with having to cut your prices. Whilst it made record deliveries they were still less than 400,000 which in the grand scheme of things is not much. Also in a mirror image of the discussion we have had in the past about banks and how it is difficult to get absolute profit figures there are plenty of doubters about the Tesla ones.

The other issue is cash flow as there were worries it would run out. One way it dealt with this was typical in an era of low interest-rates and QE.

Turning to the balance sheet, and Tesla has developed a sizeable cash buffer of $6.3bn, up from $3.7bn at the end of 2018. In part thanks to its improved cash generation, and in part thanks to the $2.3bn it raised in May last year. ( FT Alphaville )

So it borrowed some and on the surface it looks as though cash generation has improved although that case fades once you observe the detail as explained by the FT.

Let’s start with 2019’s free cash flow figure of $973m, which we define as operating cash flow minus both capital expenditure and the net cost for solar energy systems.

The first point is that stock-based compensation, a non-cash cost for a corporate but not a shareholder, came to $898m for the year, or 92 per cent of free cash flow. Of that $898m, just under a tenth of the cost came from Musk’s ludicrous-mode pay packet, revealed chief financial officer Zach Kirkhorn on the conference call. Ex-stock based compensation, free cash flow would have been just $75m.

Hard to believe the rules allow you to do that is it not?

Also FT Alphaville points out that capital expenditure had seen some severe austerity.

In the end, 2019’s capex came to just $1.3bn — a $1bn saving which is roughly equivalent to its total free cash flow.

Kirkhorn acknowledged on the call that Tesla has got better at spending cash, not that impressive a feat given the “ alien dreadnought” production system ended up with Model 3s being made in a giant tent. But spending $1bn less than expected nine months ago is more than just counting the cents.

Yet somehow this coincides with plenty of new products and development.

If Tesla had no new models, or factories, on the horizon this may be more understandable. But this year the Model Y is due to go into production, with the Cybertruck, Roadster and Semi-truck all set to follow in the not too distant future:

How does that work exactly?

Also there are questions to be asked about the inventory.

Even though deliveries exceeded production by 7,204 units, inventory remained flat at $3.5bn.

Comment

Firstly if you have been long Tesla shares or derivatives well played. Now if we switch to the soaring share price there has clearly been a technical influence which has been this.

Investors betting against Elon Musk’s electric-auto maker Tesla collectively lost more than $1.5 billion on Thursday as the company’s stock rocketed higher after its better-than-expected earnings report.

Tesla finished Thursday’s session up 10.3% at $640.81 per share, meaning short sellers betting against the stock lost in excess of $1.5 billion in mark-to-market losses on the day, according to data firm S3 Analytics.

That is from CNBC last week which in this fast moving market is now behind the times but it illustrates the issue and there is more.

In fact, Tesla short sellers are now down more than $5.2 billion this year in mark-to-market losses after losing $2.89 billion in 2019, S3 said. Since the stock’s low of $178.97 on June 3, 2019, Tesla short sellers have covered 19.11 million shares, worth $11.1 billion, and are down $12.43 billion in mark-to-market losses, according to S3′s Ihor Dusaniwsky.

These sort of rallies require people to be short the shares and this is where it gets awkward because many of the reasons for them doing that still exist. But the situation is that this has been a “short squeeze” exacerbated in my opinion by two factors. The first is that many smaller investors and some bigger ones wont sell because they are as I pointed out earlier,

You made me a, you made me a believer, believer

Next in an era of environmentally conscious investing then new investors came in and pushed the stock even higher.

One piece of context is that the car industry seems prone to these sort of short squeezes as we saw this happen to Volkswagen back in the day. How did that turn out?

So my hint for holders is to at least consider the advice of Steve Miller and his band.

Bobbie Sue took the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run
Hoo-hoo-hoo, go on, take the money and run
Go on, take the money and run

2019 and all that….

As we arrive at Christmas and reach the end of the blogging year there is a lot to consider and review. Markets have thinned out to such an extent I noted a news service mentioning a rally in Japan earlier. Well I suppose 9 points up to 23,830 is indeed a rally but you get the idea. It also gives us a opening perspective as that level means it has been a successful year for The Tokyo Whale. As it progresses on its journey to buy all the ETFs listed in Japan the buying on down days strategy has been a winner on two counts. Firstly it provides a type of put option for an equity market already bolstered by a negative interest-rate and other forms of QE or rather QQE as the former name got rather debased in Japan by all the failures. Secondly it can declare a marked to market profit although of course there is the issue of how you would ever take it?

Below from this morning’s Bank of Japan balance sheet update are its holding so far.

28,199,294,050,000 Yen

The Plunge Protection Team indeed.

As Governor Kuroda enjoys his glass of celebratory sake there is the issue of the economy though which this was supposed to boost. This morning’s release of the minutes of the October meeting suggest little real progress has been made here.

A different member pointed out that, taking into account the current situation in which downside risks to economic activity and prices were significant, the Bank should continue to examine whether additional monetary easing would be necessary.

Then there was this,

In response to this, some members pointed out that, while it was appropriate for the Bank to maintain the current monetary easing policy at this meeting, it was necessary for the Bank not to hesitate to take additional easing measures if there was a greater possibility that the momentum toward achieving the price stability target would be lost.

This really is fantasy stuff as the inflation rate below indicates.

  The consumer price index for Japan in Novbember 2019 was 102.3 (2015=100), up 0.5% over the year before seasonal adjustment, and up 0.2% from the previous month on a seasonally adjusted basis.

More significant is the index level showing a total of 2.3% inflation since 2015 or in spite of the Abenomics effort there pretty much isn’t any. The Consumption Tax rise will bump it up for a bit and then it will presumably go back down just like last time.

Tesla

As you can see there was quite an event yesterday,

New York (CNN Business)Tesla CEO Elon Musk once said he had a buyer that would take Tesla private at $420 a share. That never happened — but the stock just got there on its own.

Musk tweeted in August last year that he is “considering taking Tesla private at $420. Funding secured.” At the time, the share price was $379.57 — nowhere near $420. Speculation about the identity of the mystery buyer was rife, and many investors thought Musk might be making a joke: 420 has become synonymous with cannabis culture.

This provokes all sorts of thoughts starting with Elon Musk should in my opinion have been punished much harder for that tweet. Next comes the fact that the share price fell to US $180 in June when there were lots of doubts about the company. One of the amazing parts of the rally has been that they have not gone away. In fact in some ways they are reinforced by this sort of thing,

BEIJING/SHANGHAI (Reuters) – U.S. electric vehicle maker Tesla Inc (TSLA.O) and a group of China banks have agreed a new 10 billion yuan ($1.4 billion), five-year loan facility for the automaker’s Shanghai car plant, three sources familiar with the matter said, part of which will be used to roll over an existing loan.

Also I guess it has benefited to some extent by the stock market ramping of President Trump. A development which we noted late last year carried on where he is essence got at least some of the policy moves from the US Federal Reserve he wanted and the equity market has flown.

The S&P 500 climbed 0.09, hitting another all-time high of 3,224.01. The Nasdaq Composite advanced 0.23% to 8,945.65. The S&P 500 is up more than 28% for 2019 through Friday, about 1 percentage point away from 2013′s gain of 29.6%. ( CNBC)

Merry Christmas Mr.President….

Bond Markets

This is a slightly different story from the one above. Yes we saw some extraordinary highs for bond markets this year and out of them the most extraordinary was seen In Germany.  A ten-year yield that went below -0.7% for a while in late summer which begged all sorts of questions. In compound terms you would be expecting to lose more than 7% if you bought and held to maturity which poses the question why would you buy at all? Beyond that there is the issue of the impact on pensions and other forms of long-term saving as who would invest 100 Euros to get around 92 back?

That to my mind is one of the reasons why QE has not worked. The impact on what Keynes called “animal spirits” of the fact that we always seemed to need more monetary “help” and easing unsettled things as well as, ironically in the circumstances, torpedoing the banking business model.

But back to bond markets we saw the futures contract in Germany head near to 180 which to any does not mean much but these things were designed to be between say 80 and 120. The QE era put a light under that.

Now though things have quietened down with some longer-date German bonds in positive yield territory and the ten-year now -0.25%. Still negative in the latter case but less so. It has turned out to be a case of buy the rumour and sell the fact as bond prices have fallen and yields risen since the ECB restarted its QE bond purchases in November. Some were obviously punting on the amount being higher than 20 billion a month which is curious as for some countries ( Germany and the Netherlands for example) there are not so many left to buy.

Meanwhile back home in the UK the ten-year Gilt yield has for now anchored itself around the Bank Rate of 0.75%. There is a tug of war going on between chances of an interest-rate cut and more fiscal expansionism. But there are two themes as the fiscal policy chance to have really low borrowing yields has to some extant passed and as a final point real yields are still strongly negative.

Comment

I intend to take a break until the New Year. So let me wish you all a Merry Christmas and a Happy New Year and I will return in the next decade.