It has been a big week in Electric Vehicle (EV) land. First, during the first game of what is shaping up to be a fascinating World Series (yes, I may be British, but I can still appreciate America’s national pastime!) GM (GM) unveiled their latest and some might say greatest entrant into the field, the Hummer EV. Then, after the close yesterday, the big daddy in the industry, Tesla (TSLA) reported Q3 earnings that beat the street and represented a fifth consecutive profitable quarter for Elon Musk’s company.
There are some that said we would never see that, but I was not among them. People often think that because I specialize in oil and energy from a trading perspective, I am, by default, an EV skeptic. They could not be farther from the truth. I am, above all, a trader, and as such I try my best to stay rooted in reality. The simple fact is that EVS are immensely popular right now.
It could be that at some point in the future, another technology will supersede battery power, or it could be that future governments, worried more about the devastation of their oil industries than environmental concerns, will remove the subsidies that currently keep EVs competitive. Both of those things are possible, but betting on them at this point would be just plain dumb.
That is why I have been frequently bullish on TSLA’s long-term prospects, including here and here at the end of last year. Indeed, if you have been a subscriber here since the beginning, you may remember us banking a nice profit on a long TSLA position back then. As I said, though, I am a trader first, so I have also on occasion shorted the stock when it looked particularly overvalued or over-hyped. Doing that, however, is a much riskier proposition lately, and has to be kept to a limited time horizon, as the stock’s 1-year chart makes abundantly clear…
Are There Any Bear Cases Left Intact?
Part of the problem for TSLA bears is that they are running out of excuses to short it.
The “EVs are just a fad and will never be really successful” argument died a long time ago, and the last five quarters’ results have shown that “they will never make money” is headed the same way. What is left is the belief that Elon Musk, with his unorthodox style, his tendency to be distracted by shiny objects like in-home solar and space travel, and his well-known love of strange smelling cigarettes, will somehow destroy the business. Or I guess you could argue that contrary to the evidence of markets since the 1990s, valuations actually matter.
The latter has some appeal to me, but it ignores the possibility that the P/Es of TSLA will shrink because of earnings growth, not stock price declines. If there is enough belief that that can happen, the market will be incredible patient. If you doubt me, I suggest you take a look at the chart for a once “over-hyped and overpriced” e-commerce stock, AMZN.
The Main Danger to TSLA’s Dominance
If there is a danger to TSLA though, it may be in the week’s other big EV news. The Hummer EV may or may not be a hit in itself, but it is indicative of what is to come. Big auto manufacturers have certainly been arrogant and short-sighted in the past, but on this subject, they are anything but. Sure, their serious entry into the market is later than most would have liked, and they are a bit behind the likes of TSLA in terms of battery and other technology, but they are catching up fast. Let’s face it, optional packages that offer a range of 500 miles plus, a big truck that reportedly goes 0-60 mph in around 3 seconds, and tales of a 10 minute charge giving 100 miles of range don’t indicate that GEs tech is behind at all, let alone far behind!
That isn’t to say that the Hummer EV will be a massive success though. There is the little matter of price, and with the limited-edition model that forms the initial launch starting at $112k, that may be a big obstacle. When EVs had novelty value and a certain caché for those that wanted their car to say, “I’m very rich, but I care, honestly!”, price was really not an issue. Those days are largely gone, though, which is why Tesla introduced the Model 3 and why that reasonably priced model now accounts for the vast majority of their sales.
However, Tesla themselves started with a high pricing structure, and have obviously benefited from scale, so is it unreasonable to think that GM will be able to do the same? And they do have less expensive options and packages slated for release soon, so $112k is just a starting point.
All of the major, and a lot of not so major, car manufacturers around the world have EVs inn production and/or plans for them. Some have gone to extremes, such as Volvo, who plan to offer only EVs and hybrids by 2025. It is going to be a very crowded market very soon, and if increased demand results in continued declines in battery pricing, an increasingly price-competitive one too.
That is when we will find out what Tesla is made of. Will the quirky brand-building involving things like the fart noise app and the extremely cryptic tweets of Musk have built a brand durable enough to withstand that kind of competition? Will the rapidly expanding network of Tesla chargers give them a lot more of a first to market advantage than most imagine right now? Or have they already bitten off more than they can chew, expanding into a market that could quickly become saturated?
Over the next few years, the answers to those questions will become clear, but there just isn’t enough information right now to trade them.
Should You Trade TSLA, Invest in It, or Neither?
Despite that, in the short-term, I think I would rather be short TSLA than long. Not for the reasons stated above, but simply because I understand the psychology of traders. They have been betting for years on Tesla becoming profitable, growing rapidly, and sticking it to the bears in every way possible. That time looks to be here now, but the reality can never live up to the excitement of the expectation. Some kind of massive “buy the rumor, sell the fact” effect looks almost inevitable and, judging by the retreat from the post-earnings highs we have seen today, it could already be underway.
I will be running a short TSLA position for a bit, looking for a drop back to around $650. If that doesn’t come quite quickly, though, I will be out, and if it does, as tempting as it will probably be after a quick drop, I won’t play around with the position. I’ll just cut and, if anything, maybe look to get long again.
That’s the thing about TSLA. It has been, and continues to be, a great swing trading stock. I have been bullish on it in the past from an investment perspective, hoping for these kinds of levels. That has worked out well, but now we are here, I will wait for a clearer outlook before taking any position designed for long-term holding.