One day ahead of Tesla's Q3 earnings which overnight were unexpectedly pulled forward to Wednesday, Oct 24 and shortly after Elon Musk's twitter account was temporarily locked amid speculation it had been hacked, a bigger surprise hit on Tuesday morning when noted short seller Andrew Leff's Citron Research reversed its multi-year bearish call on Tesla (and as a reminder, Citron recently joined a class action lawsuit against Tesla) saying "as much as you can’t believe you are reading this, we can’t believe we are writing this!" and explaining that "Citron is now long Tesla", as the Model 3 "is a proven hit and many of the TSLA warning signs have proven not to be significant."
$TSLA dropping earnings on top of $F tomorrow might be a bad sign for shorts. After reviewing all recent info on $TSLA dominating its categories, Citron is LONG Telsa for this quarter. Full report https://t.co/eZLSbtL0kg— Citron Research (@CitronResearch) October 23, 2018
What has changed, Leff asks rhetorically and answers: "Plain and simple -- Tesla is destroying the competition."
These few charts illustrate what is happening in the car industry the past few months:
While the model 3 is completely dominating its class amongst mid-size luxury, let us not forget the Model S, which is by far the largest seller in the large luxury car market.
Leff then counters that Critics will say "of course Tesla is selling a lot of cars, there was a backlog of 2 years of demand" and notes that "we’re seeing that demand is new this year and pulling directly from TSLA's competitors."
In addition to the allegedly rising demand for Tesla vehicles, Citron also lists the following reasons "Why be Long" Telsa:
This is a critical quarter for Tesla and there are many reasons we want to be long (and would certainly not want to be short) into this print:
- Tesla will, finally, after 10 years of unprofitable existence, have the ability to prove that it can be a sustainable, highly cash flow generative entity that is no longer reliant on the capital markets.
- A strong quarter removes the overhang of a necessary capital raise – we suspect that Tesla will be generating more than enough cash to both fund aggressive growth plans and build cash on the balance sheet.
- It transitions Tesla from a “proof of concept” story to a “TAM / how much can this grow” story, attracting a whole new growth-oriented investor base.
- It makes the bear case solely about Valuation and Demand.
- Short interest is at the same (high) level as five years ago though risk is heavily skewed to the upside in the near-term.
Even if Tesla does not meet its profitability goals, it is well funded and long-term shareholders will look towards:
Secured an agreement to build a wholly owned Shanghai facility (Note: this was the first time China let a foreign automaker open up shop without a Chinese company as its partner)
- The entrance of Model 3 in the European market
- New factory to be constructed in Europe
- Possible resolution to US / China trade war (and subsequent dropping of 40% tariffs)
- Tesla semi truck production announced
- Tesla added to S&P (likely an April 2019 event)
- Model Y Unveil (March 2019)
- Q4 deliveries and earnings far in excess of consensus
- Potential analyst upgrades given significantly negatively skewed consensus and positive Q3 performance
- The imminent release of the Tesla 9.0 autonomous software
Most importantly, Citron believes that Musk is focused on a Tesla stock price above $360, "which would remove significant amounts of convertible debt (strike price $330-$360) and leave the Company with a very manageable debt load comprised of $2B of senior notes."
Citron also made some observations on whether or not Tesla is profitable:
When Munro began tearing down the Tesla in April, it released comments saying that the vehicle was horrific, reminiscent of the build quality of a Kia from the 1990s. However, in a stunning turnaround, Munro completed its tear down and cost analysis in July and ultimately admitted that the final results of its Model 3 analysis were not at all what was expected.
Poking fun at his initial reaction, Munro stated “a lot of crow (was) being eaten around here.” “The Model 3 is profitable. I didn’t think it was gonna happen this way, but the Model 3 is profitable. Over 30%. No electric car is getting 30% net, nobody,”
Whether or not that's the case will be unveiled tomorrow.
Leff also has some words for his critics:
We know this note is going to have many critics, most being our fellow short sellers who might categorize us as opportunist. To anyone who challenges the integrity of Citron or our constant monitoring of the Tesla story all you have to do is look at the class action lawsuit recently filed against Tesla. In it you will see the principal of Citron was actively trading tens of millions of dollars of Tesla and the infamous "$420" tweet resulted in a loss of almost $2 million. By no means does Citron only trade on publishing stories. We actively manage a book that has been trading Tesla for five years. Yes, we are still suing Musk and Tesla and this recent report has no bearing on the current lawsuit.
And finally, the conclusion touches on the possibility that Tesla moving its earnings release is a catalyst for a major upside surprise:
As of the writing of this report, Tesla has just announced it has moved up its earnings release date to October 24. The last time TSLA reported Q3 earnings in October was in 2016 – when revenue beat the consensus by 21%. Does anybody think that Tesla decided to move up its earnings release date because of bad news? Sometimes the truth is stranger than fiction. While we may not be fans of the overconfident CEO, we cannot dismiss what we are seeing in the marketplace.
We'll know tomorrow if Citron is right; considering some of Citron's recent calls - most notably its Tilray short which destroyed many short sellers - it may be a close one.
For the moment at least, shorts are hurting after the Citron report:
Full report below: