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    « Tesla‚Äôs Theranos moment arrived -- should you sell your puts? | Main | Salesforce stinks, GW is high. Play NICE. »
    Friday
    Aug102018

    Is Tesla about to have a Theranos moment?

    Sent to subscribers August 9 2018 12:25 a.m.

    A few years ago, I was reading a magazine article in bed, and I said to my wife, “Look at this crazy board of directors. This company has a pretty young woman who dropped out of Stanford, and now she’s got all these famous older men on her board who know nothing about medicine. George Shultz (former Secretary of State), William Perry (former Secretary of Defense), Henry Kissinger (former Secretary of State), Sam Nunn (former U.S. Senator), Gary Roughead (Admiral, USN, retired), James Mattis (General, USMC), Richard Kovacevich (former Wells Fargo Chairman and CEO) and Riley Bechtel (chairman of the board and former CEO at Bechtel Group.) The young woman, Elizabeth Holmes, had the nifty idea to use just a drop of blood for medical tests, and now she’s worth over a billion dollars.

    It doesn’t smell right. Only one senator, Bill Frist, has been involved in medicine (he was a former heart surgeon), and you can almost see these guys getting invited to the board. ‘Look, she’s really photogenic and smart, and we’re all going to make a ton of money.’”

    In 2016, the company blew up. The technology didn’t work – or they were working on it, but pretending that it already worked. Oddly, George Shultz’ own grandson blew the whistle, indictments were handed down, and private investors lost $700 million.

    New technology is difficult and messy. It’s hard to create and ramp-up, but investors expect magic. I remember the criticism heaped upon Steve Jobs for taking an extra year to finish the first laser printer. That was truly a game-changing product, but Jobs was derided for the delay. It’s no wonder that Jobs became super-secretive in later years. No one wants to see the sausage made: they only want the good news: “Here is the awesome Apple iWow that will change the world!  And one more thing –.”  Ahhhhhh…..  Buy, buy, buy!

    Like the fair Elizabeth Holmes, Elon Musk has become accustomed to being lionized. He launches cars into space. He makes flame throwers. When traffic frustrates him, he bores tunnels. He sends subs to caves. He gives away the hyperloop, then decides to make one, too. He is the Iron Man of physics whether flying to Mars or outfitting solar roofs. He doesn’t want to hear from doubting investors. His Tesla problem, though, is how to make a lot of cars profitably.

    Has Elon Musk set up an equation that even he himself cannot solve?

    Maybe. Tesla is producing perhaps 5000 cars a week now. By comparison, Ford produces about 125,000 cars a week. Ford has a market cap of $40 billion. If Tesla completes its buyout, it would be the largest in history at $72 billion.

    A lot of smarter people have already done the analysis and they’re betting 34.5 million shares against Tesla. At the current value, Tesla has about $12.7 billion in short interest, and that’s a big marker – one that, if wrong, will ruin a lot of lives and careers.

    That’s why Musk’s tweets don’t smell right to me: “Am considering taking Tesla private at $420. Funding secured. Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”

    First, there is the price of 420, which is code for “time to light up a joint.” It could be coincidence, a playful joke, or Musk’s mind sending out a subconscious message.

    Second, there is Musk’s apparent desire to squeeze the shorts, which might be illegal. In any case, people with $12.7 billion on the line are not going to take that lying down. How many lawyers are working on that problem now? 50? 100?

    Like Theranos, there is a germ of truth to what Tesla is doing: electric cars are cool. But there is a lot that doesn’t smell right about Tesla, and its CEO’s recent outbursts seem increasingly unhinged. Also, other car companies aren’t standing still. We bought our second Ford plug-in, and it’s a fine car.

    Then there is China, which sold 579,000 electric cars in 2017 versus 198,000 in the U.S. When the Chinese commit to making something, they make it until they destroy the market. Have you seen the piles of discarded Chinese rental bikes? https://www.theatlantic.com/photo/2018/03/bike-share-oversupply-in-china-huge-piles-of-abandoned-and-broken-bicycles/556268/  The worst stock I ever bought was NMM – a great ship leasing company – until the Chinese destroyed the market for ships. Last year, the Chinese delivered over 11,000 electric cars a week; they will bury us in electric cars when they ramp up – and they know how to ramp up. Even Apple goes to China to make its phone.

    If Musk’s short-squeeze fails, it will fail spectacularly, which is why I’m buying some short-term puts on TSLA at a strike-price of $290. This might be a good hedge for anyone who owns Tesla because, while Tesla has paid well so far, the downside could be painful without a little insurance.

    If you’re thinking about buying Tesla, don’t. It’s a bag of risk, and the CEO just announced a $420 cap on the price, so you might make $50 or 13% for your risk.

    IN OTHER PERFECTCOMPANY NEWS

    Our favorite pick, NVDA, was named the best stock of the last five years by Boston Consulting Group. https://www.cnbc.com/2018/07/12/tech-media-companies-created-most-value-for-shareholders-study-says.html Also, NVDA and IBM created the fastest supercomputer on the planet recently – bringing that title back to the U.S. from China for the first time in years. https://www.datacenterknowledge.com/supercomputers/ibm-nvidia-build-world-s-fastest-supercomputer-us-government  NVDA continues to extend its technological lead.

    NICE was at $103.56 on May 16; in after hours trading today, it hit $112.99. The call center / customer response market is big, and NICE is operating on every field: AI, chatbots, cross platform automation, and traditional call center operations. As everything automates, NICE will own a good chunk of that business process.

    SalesForce, despite my disrespect, climbed from $123 to $145. I saw their new building in New York and their “#1” billboards everywhere, but it looks like more lavish spending to me. I wish I could invest in private SugarCRM because I think they will eat SalesForce’s lunch – or force a buyout. See:  https://www.sugarcrm.com/press-releases/enterprises-increasingly-reject-proprietary-cloud-solutions-driving-strong-first-quarter

    The mariceutical company, GWPH, fell from $150 to $134. I still would not buy this company, but, if you like marijuana medicine, consider buying long-term calls to limit the considerable downside.

    WHAT THE ASTROLOGERS ARE SAYING

    A former Presbyterian who became an astrologer explained to me yesterday that anything with a birth date can have a chart, so companies and stock markets can have charts, too. This person also explained that astrological services are in high demand by investors and that certain astrologers had quit their full-time jobs to provide investment advice. OK, so that explains the success of SalesForce.com

    And then she told me that Uranus is in Taurus and the consensus among astrologers is that there will be a pull-back. I asked my medium to connect me to Nancy Reagan, and she confirmed the coming market decline, so I am sticking with my two-month, 20% out-of-the-market S&P puts for portfolio insurance. Also, we’re having a trade war.

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