Elon Musk Versus the Haters

Tesla is burning through cash and losing billions. It’s also crushing short sellers.


Mark Spiegel likes to think of himself as a car guy. That’s why he began shorting the stock of Tesla Inc., the electric-car maker that is part of CEO Elon Musk’s mission to save the planet, starting with the auto industry. “I’m a total car nut; cars fascinate me,” says Spiegel. That said, he has never driven a Tesla. It just doesn’t interest him. “I’m more into sports cars,” he explains. As for the environmental benefits Tesla promises, he says, “I am agnostic on that.”

But the 56-year-old hedge fund manager has an opinion on Tesla’s high-flying stock — and it’s bad. Dressed in khakis and a baby-blue polo shirt when we met recently for drinks at the Pierre hotel’s art deco cocktail lounge in midtown Manhattan, Spiegel is a wiry ball of energy who explains how selling commercial real estate to guys running garbage and garment companies in the Bronx and Queens taught him that business is “sharklike.” He’s jazzed up on two Diet Cokes and talks almost nonstop about Tesla’s financial woes, ranting about what he calls the deceptiveness of Musk, the man whose supporters believe is the reigning visionary of Silicon Valley following the death of Apple co-founder Steve Jobs.

“Tesla is a zero,” Spiegel declares, reiterating the theme of his short presentation at the Robin Hood investment conference last November — a thesis that boils down to the fact that Tesla has been burning through cash and losing hundreds of millions of dollars a quarter, and will face a slew of electric-car competitors over the next few years. These include rivals like Porsche, which is what he drives. “Tesla is losing a massive amount of money with no competition, and yet massive competition is coming,” he says.

Spiegel has become something of a zealot on Tesla. His small hedge fund, Stanphyl Capital Management, runs a mere $8.5 million, given that it was down 20 percent this year through August. That’s largely due to his short of Tesla, which had gained 74 percent this year, making it the worst-performing short of the year through September 20, according to S3 Analytics, a firm that tracks short sales. Tesla is also the biggest short in the U.S. market; about 27 percent of Tesla’ free float is short, for a value as high as $10 billion. Even so, Spiegel says he has gotten a “lot shorter” as the stock has soared; it’s now 25 percent of his fund. “The bigger the position gets, especially when it’s going against you, the more it tends to focus your mind,” he says.

Small fry like Spiegel, who describes himself as a cynic and “wise guy,” don’t usually get the stage at Robin Hood, where investors fork over thousands of dollars to the New York City nonprofit for the opportunity to hobnob with billionaire managers for exclusive insights into their stock picks. But Spiegel’s Tesla short research was something people wanted to hear — at least people like Greenlight Capital CEO David Einhorn, who invited him to speak.

Einhorn, too, is losing money shorting Tesla as part of what he calls his “bubble basket,” as is renowned short-seller James Chanos of Kynikos Associates, who has been railing against Tesla for at least two years on CNBC and at numerous conferences. He has gone so far as to call Tesla a cult.

“If you wouldn’t short a $65 billion company with negative free cash flow, questionable accounting, an executive exodus, in a soon-to-be-competitive industry, what would you short?” Chanos said in a September 20 interview with Institutional Investor, telescoping a litany of the short sellers’ complaints.

Tesla may have briefly surpassed General Motors Co. in terms of market capitalization, but it is swimming in red ink. Its cumulative losses have hit $3.7 billion, and negative free cash flow was $1.8 billion as of June 30. Both numbers are expected to get worse before they get better. Negative free cash flow could hit $4.7 billion this year, for an unprecedented total cash burn of $10.6 billion, says Sanford C. Bernstein analyst Toni Sacconaghi.

Small wonder everyone who’s anyone in Wall Street’s small and clubby world of short sellers has been short Tesla at one point or another. Citron Research’s Andrew Left, famous for his bomb-throwing short research, was one of the first to publicly attack Tesla, in September 2013, three years after it went public, when it was trading around $180. He warned investors that “the stock is perched at a level of extreme unsustainability.” He reiterated his short arguments this summer, when it was trading at $327. Another Tesla basher is retired short-seller David Rocker, who says Tesla “is one of the most incredulous divorces between facts and dreams” he’s seen in a 50-year career of investing. Rocker has 2 percent of his net worth short Tesla, and he also has become an investor in Stanphyl Capital.

Looking at its balance sheet, Tesla is the perfect short. But its pioneering status in an industry facing wrenching technological upheaval, and its charismatic CEO, has won it legions of admirers and turned it into a battleground stock. Sure, Tesla’s lofty stock price makes it a risky buy — but also a perilous short.

“It was the worst short I’ve ever had,” says Whitney Tilson, managing partner of Kase Capital Management, who was short Tesla between 2013 and 2014, when the stock went from $35 to $205. Last month, Tilson told investors he’s shutting down his funds due to poor performance.

Tesla checks all the red flags short sellers look for, but, he shrugs, so what? “I can do the numbers and see how much money the company is losing, but you’re short an incredibly maniacally driven CEO, with maniacally driven engineers assaulting the world’s largest industry. If they succeed, Tesla could be a $400 billion market cap company.”

Tilson has continued to follow the Tesla saga but has resisted the urge to short it again. “Tesla is a good case study in how the world’s smartest short sellers can get sucked into something that’s just a bad short.”

At least it has been so far. And unless there is a market crash or a major fumble by Tesla in the execution of its lofty ambitions that shut off its access to the capital markets, it is likely to stay that way. Short sellers berate Tesla investors as momentum chasers, tree-huggers, or simply Elon Musk groupies, but these investors have bought into a vision that has already made great leaps toward building a sustainable energy ecosystem — a costly endeavor that has no shortage of well-heeled enemies.

“There is little to dislike about Tesla’s mission, vision, and products [that make] Tesla’s ‘permanent revolution’ so popular with many investors,” London-based Jefferies analyst Philippe Houchois wrote in his initial report on the company in September.

Since Spiegel made his November 29, 2016, Robin Hood presentation, Tesla’s stock has almost doubled; it hit a record intraday high of $389.61 on September 19 before slumping on the report from Houchois, who with what he called a “heavy heart” threw cold water on the party by pointing out that turning a profit is going to take Tesla longer than most predict — until 2020. Moreover, the $3.26-per-share loss he predicts for 2019 is $5 per share lower than the $2.40 profit consensus. The analyst argued Tesla’s rivals are far behind it, which could give it more than 25 percent of the electric vehicle market between now and 2019, but shares nonetheless fell 7.6 percent the week of his report, its biggest drop this year, and continued to slip the following week.

There have been plenty of pullbacks of Tesla shares over the past seven years, but despite the occasional bad news, the stock has soared more than 1,300 percent since Tesla went public in 2010. It is the first automaker to go public since Ford in 1956, making it one of the darlings of the post-financial-crash bull market. Short sellers like Spiegel put it another way: “This is the largest single-stock bubble in this entire bubble market.”

Tesla has a long way to fall for the short sellers to profit. Houchois’s price target of $240 per share is above most short sellers’ break-even point: Chanos’s average cost is in the low $200s, as is Spiegel’s. Houchois says zero seems unlikely. “Despite some bearish views in the markets, Tesla is well past the risk of failure,” the analyst argues.

To be sure, a mania surrounds Tesla. The company introduced its first all-electric luxury sedan, Model S, in 2012 and an SUV Model X in 2015. This year it is rolling out a mid-priced car, Model 3, that will sell for between $35,000 and $55,000. Customers have already put in reservations for more than 455,000 of the Model 3, the delivery of which is going to create “manufacturing hell” for Tesla, Musk warned shareholders earlier this year even as the prospective rollout fueled the stock. In August, Tesla raised $1.8 billion in junk bonds, giving it a net debt of $9.3 billion, to help finance its growing ambitions, which also include ramping up coast-to-coast Supercharging stations that are free to Tesla owners — a main selling point that so far gives it an edge over rivals as other electric vehicles come into the market.

Tesla is also promising to unveil electric trucks in late October, and in upcoming months is expected to detail what Morgan Stanley analyst Adam Jonas calls Tesla Mobility, essentially a self-driving, Uber-like fleet that Jonas believes eventually could account for half of its value. Tesla chief technical officer JB Straubel recently said the company might even partner with restaurants or convenience stores to place charging stations there for Tesla owners — an idea that merited snickers on Twitter, where Tesla shorts rant about all things Tesla.

Last year, Tesla took over SolarCity Corp., Musk’s troubled solar company (a stock Chanos shorted profitably), which has added billions of dollars in debt and liabilities to its balance sheet but is also generating cash. SolarCity is also giving Tesla access to solar power for its huge supercharger networks. “Over time almost all will disconnect from the electricity grid,” Musk tweeted in June. Tesla also is building huge gigafactories that make lithium batteries for its cars. That’s another way in which it is ahead of the competition — though others are scrambling to catch up.

To Tesla enthusiasts, all that means Tesla is not just a car company, or a tech company, but a transportation transformation play. “The bigger picture is largely missed” by the critics, says Gene Munster, co-founder and managing partner of Loup Ventures, who argues Tesla could be the next Amazon. Although Amazon started by selling books online, it has morphed into the world’s biggest retailer (by market cap), upending that industry.

“Investors tend to focus on the car. But Tesla’s business model is about capturing energy, storing energy, and then consuming it, which is their car business.” That combination means the company is not just an automaker, but “something that will disrupt energy consumption. They’re not going to own these markets, but they will be a large participant,” predicts Munster, who is famous for his prescient views on Apple while an analyst at Piper Jaffray.

“Elon Musk is a genius, full stop,” says Thomas Siebel, founder and chief executive of C3 IoT, a data analytics startup, and technology industry veteran who recently served with Musk on the board of Stanford University’s School of Engineering. (Musk studied there for his Ph.D. in applied physics before leaving to become an entrepreneur.) “This guy is a great innovator,” Siebel says. Whatever happens to Tesla, he says, “it will absolutely have changed the world auto industry. Everyone is following his lead.”

The disruptive nature of Tesla’s plans often evokes comparisons with Amazon and Apple, though some warn against making too much of it. The problem, Jefferies’ analyst Houchois says, is that while Tesla shares common ground with Apple in its branding message and “superior consumer product” and with Amazon in “infinite growth opportunities,” its capital needs are far greater than either’s.

“Spiritual peers like Amazon and Apple feature capital-light business models with [return on invested capital] that Tesla cannot aspire to in its current business model,” he said in his September report.

Amazon didn’t turn a profit for years, but has generated substantial cash to finance much of its growth. Tesla, on the other hand, needs constant access to the capital markets. “They have to raise more capital by early next year, because they’re already going to burn through what they just raised,” says Chanos. That gives short sellers like him a darker view of Musk’s grand visions.

“The biggest challenge for Tesla is keeping the story afloat,” Chanos says. “The story is always the next thing. It is focusing people not on the results or any near-term issues but ‘when I’m going to do the next big thing,’ whether it’s trucks or full autonomy or something else.”

The “story” explains Tesla’s astonishing market cap of about $57 billion. That is close to GM’s ($59 billion) but trails Daimler’s ($84 billion). Even Musk himself has seemed somewhat stunned by Wall Street’s heady embrace.

“I’ve gone on record several times saying the stock price is higher than we have any right to deserve. And that’s for sure true based on, you know, where we are today and have been in the past. So the stock price obviously reflects a lot of optimism about where Tesla will be in the future,” he told the National Governors Association in July.

“Place bets accordingly,” Musk later tweeted. The Tesla CEO declined to be interviewed for this article.

Whichever way you look at it, Tesla’s vertical integration is a tall order, and Wall Street analysts have grown more skeptical, as Tesla’s bottom line hasn’t improved, while the stock has skyrocketed. Two of Wall Street’s Tesla bulls, analysts at Morgan Stanley and Deutsche Bank, lowered their estimates for next year and downgraded the stock. Goldman Sachs, which is one of its underwriters, has a sell on the stock.

“It’s a leap of faith,” says Jonas, who admits Tesla is hard to value. “Tesla is a risky investment . . . if it works, it could be very large. They are sizing this to be a very large disruption.”

Moreover, he believes 46-year-old Musk truly is a man on a mission. “I don’t think he’s working for money. I think he’s genuinely trying to save the planet. If you spent an hour with Elon Musk talking about the future of transportation and energy and our planet, he would change the way you think about things.”

One way to understand the incredible improbability of Tesla’s existence, and Musk’s journey, is to watch the 2006 documentary Who Killed the Electric Car?. Electric cars, it turns out, aren’t a new concept. In 1996, GM spent $1 billion to launch an electric car in California — whose skies were filled with smog from the internal combustion engine — that won praise for being both quiet and fast. (Tom Hanks drove one, and said he was saving the world.) But within ten years the auto giant not only pulled all those cars from the hands of their drivers to wails of protests; it also crushed every single one of them and dumped their remains in landfills. The pullback occurred as automakers and the Bush administration sued the California Air Resources Board to kill the zero-emissions standard it had introduced — which had led to the car’s development. CARB nixed the standard in 2003 — the year Tesla Motors (now Tesla Inc.) was born in Palo Alto.

By 2006, GM was taking the last of its electric cars to the dump — just two years before it declared bankruptcy and had to be bailed out by U.S. taxpayers. Into the void stepped Tesla, which took over a former GM assembly plant in Fremont, California, close to San Francisco. Tesla started off with a sports car, but in June 2012, after raising $226 million in its 2010 IPO, put the first electric luxury sedan, the Model S, on the road.

With its sleek, minimalist styling, the Model S is a car incarnation of an iPhone (an iPad-like tablet next to the steering wheel performs a lot of tasks). It’s no accident that spare, white Tesla showrooms also have an Apple feel (they were designed by a former Apple exec who worked at Tesla). With its elegant, streamlined look, long-range batteries (more than 200 miles on a single charge), and fast acceleration (zero to 60 miles per hour in 2.5 seconds), the Model S wowed the market, winning top ratings from Consumer Reports. Driving a Tesla, as this writer did, is like gliding on air.

Musk did something GM never could: He mastered the Steve Jobs art of making his product cool. Whether you consider it a car company or not, the success of the Model S is key to Tesla’s popularity with not only car owners but also investors.

Tesla’s Model S costs about $90,000 (after $7,500 in federal tax credits that are likely to end soon). But despite the lofty price, the car took off, forcing other automakers to rethink the electric car. GM is back in the game with the Chevy Bolt, which is said to be a competitor to Tesla’s upcoming Model 3. Nissan also offers an electric car called the Leaf, with a shorter range. Now a slew of others are in the works that could rival Tesla’s long range, a key issue, by 2020. Perhaps the most exciting, the fast-charging Porsche Mission E, was unveiled in September.

The boom in electric cars is also being driven by governments in Europe and China — big importers of oil — that are pushing automakers to get rid of gas guzzlers as they embrace zero-emissions standards.

But even while automakers in the U.S. are bringing electric vehicles to market, they are still lobbying against better fuel-efficiency standards, set to average 54.5 miles per gallon by 2025 for a company’s entire fleet of cars. To comply, at least 25 percent of a company’s auto sales will have to be from electric cars, estimates Chelsea Sexton, co-founder of Plug In America, a pro-electric-car lobbying group started after GM killed its electric car.

Within 24 hours of Donald Trump’s election as president of the U.S., the industry started lobbying the Environmental Protection Agency to water down that rule, says Sexton, who was in charge of marketing GM’s earlier electric vehicle. “Very few [automakers] have said electrification is the wave of the future going forward,” she says. She is wary. “We have to be really careful in saying that this is a rolling snowball that can’t be stopped . . . because we’ve seen this movie before.”

What sets Tesla apart from other carmakers is the fact that its whole future is based on electric vehicles. In an update to Tesla’s mission statement last summer, Musk reflected on the company’s history: “I thought our chances of success were so low that I didn’t want to risk anyone’s funds in the beginning but my own. The list of successful car company startups is short. As of 2016, the number of American car companies that haven’t gone bankrupt is a grand total of two: Ford and Tesla. Starting a car company is idiotic and an electric-car company is idiocy squared.”

For many years Musk has been trying to harness technology to big ideas that have been largely absent from the tech VC world. As VC billionaire Peter Thiel has famously stated, “We wanted flying cars, instead we got 140 characters.” (Musk and Thiel created PayPal, and its sale to eBay for $1.5 billion in 2002 was the basis of the $70 million Musk invested to fund Tesla. With a 20 percent stake, he’s now worth $21.4 billion, according to Forbes.)

“One should never dismiss Elon Musk’s creativity and resolve,” says Houchois. After all, this is a guy who walked up to a woman at a party when he was in college and proclaimed, “I think a lot about electric cars,” according to an account in Ashlee Vance’s 2015 biography of Musk. That was almost 30 years ago. Musk, who was ranked the 21st most powerful person in the world by Forbes last year, has also started a space company — SpaceX — and envisions a future with electric passenger jets. He’s even talking about traveling to Mars.

Thiel has argued that science fiction turned dystopian because people no longer were optimistic about technology’s ability to change the world. Musk has given people a reason to believe. That is something even Chanos acknowledges, while disparaging it at the same time.

“People want to believe he’s some sort of visionary,” Chanos says. “In a milieu of boring people, they think he is changing the world. He’s not boring. He’s somebody they can attach their hopes and dreams to.”

Moreover, Americans love technology; they also love their cars, and they are obsessed with the new. Just ask any Tesla owner. “What I really like about this car . . . everything is different,” a beaming Scott Esposito, a PricewaterhouseCoopers exec who drove down from Middletown, Connecticut, to Mount Kisco, New York, to pick up his new Model S, said on a recent Saturday afternoon. “It’s so different from a regular car. I love the technology, and that you get the constant updates on the car. I love that you don’t have to buy gas anymore.”

Musk’s critics are serious money men from the East Coast who like to think of themselves as value investors who analyze hard assets and cold cash, not big ideas. In the past, some of them also shorted Google and Amazon — other high flyers who weren’t making a profit — and somewhat sheepishly admit they were wrong. Clearly, these guys are not dreamers from California’s La La Land, and Musk’s grand plans and his “save the world” ethos can elicit a few eye rolls.

Tesla’s biggest investors aren’t smart-money hedge funds, except for quant funds like Two Sigma and AQR Capital Management with small positions. The biggest holders, aside from Musk, are mutual funds like Fidelity Investments, which has owned the stock since the IPO. With a current 12.8 percent stake (down from a high of 15 percent), the mutual fund giant is the largest institutional investor in Tesla, and portfolio manager Kyle Weaver says Fidelity has a long-term perspective on the company that is playing out largely as expected.

“The internal combustion engine is toast long term. It’s game over. The costs of making an internal combustion engine do not go down, while the cost of battery technology has gone down every year,” he says. “The secular trends that will drive Tesla’s fundamentals are a decades-long trend.”

And unlike some big shorts in recent years — Valeant Pharmaceuticals International or Herbalife come to mind — Tesla is not alleged to be a fraud that rips people off. “I’d rather short something that’s a scam,” says Tilson. He applauds Tesla’s environmental mission and doesn’t want it to fail. “I don’t want to bet against that in an emotional sense.”

Short sellers vent their anger at Musk, whom they argue is more hype than genius. Calling Musk deceptive, they say product launches have been delayed, predict the Model 3 will flop, and criticize Tesla’s accounting. Their illustration of questionable accounting is an allegedly inflated measure of gross margin that excludes research and development costs and items like the cost of acquiring, operating, and maintaining its own dealership network. Tesla promotes its gross margins — which it claims are higher than rivals’ — as one financial metric it can brag about.

But sources close to Tesla say there is wide variance across the industry. “Neither Daimler nor most technology companies report R&D as part of COGS [cost of goods sold],” one source says. “A company like Tesla — which is working on the next generation of products, disrupting the automotive and energy industries, and pushing the boundaries in terms of technology — is more focused than traditional autos on R&D and innovative technologies.”

“If there was anything misleading or inflated, it would not be allowed by Tesla’s auditor, not to mention the SEC,” the source says.

Musk’s attacks on short sellers are another red flag. Musk, who has talked about being bullied as a child, seems to delight in taunting his tormentors. In 2013 he gloated on Twitter, “Seems to be some stormy weather over in Shortville these days,” and warned there was more to come. The problem for short sellers is that they need a catalyst for the high-flying stock to tank. “There have been 30 catalysts, and none of them mattered,” gripes Spiegel. For example, following the controversy about a fatal crash in one of its self-driving cars, the Autopilot team witnessed departures of executives who reportedly clashed with Musk over the decision to roll out the feature. Musk is a notoriously demanding and difficult boss, and high turnover has been a constant — which is not unusual in Silicon Valley. Meanwhile, the stock continued its march upward, even after the National Transportation Safety Board faulted Tesla’s Autopilot system in the crash.

Spiegel thinks the onslaught of rivals will eventually bring down Tesla. But competition is the least of many analysts’ worries. They think Tesla will maintain a share of the market, and Musk himself has welcomed more electric cars. In theory, the more people want electric cars, the cheaper they will eventually be to make, and charging stations will become as ubiquitous as gas stations. Whether that’s good or bad for Tesla is up for debate. A recent survey by CleanTechnica, a news site about alternative energy technologies, indicates that Tesla’s brand is keeping consumers coming back and that its electric cars are more popular than others. But recently analysts have grown nervous about the Model 3 launch, and should it fail to live up to expectations, that would be a serious problem.

Rocker, for one, thinks a market crash will be required to bring down Tesla. But Chanos is more sanguine. “If we knew what the catalyst was, it would already be priced into the stock,” he says.

Betting against Musk is a tough proposition. Tesla has already survived near-bankruptcy events, and Musk has plenty of friends in tech companies with much higher valuations, like Larry Page at Google, that could afford to partner with Tesla or take it over. (Google had struck a handshake deal to buy Tesla during a near-death moment in 2013, according to Vance’s biography.) The Chinese are also a possibility. Earlier this year, China’s Tencent Holdings took a 5 percent stake in Tesla. China is proposing to mandate a zero-emissions standard in 12 percent of new cars by 2020 and is considering letting wholly owned foreign electric-car companies operate there. The Chinese market is expected to be huge, and Tesla is charging ahead there. It is already building a new supercharger network in the country and plans to both build and sell cars there.

Such realities make shorting Tesla, for all its financial shortcomings, a difficult call. As Tilson puts it, “I don’t want to be short open-ended situations. The tail risk is just too high.”