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  1. lvmoda

    TSLA – I'd be careful shorting this stock.   Full disclosure:  I have been quite long since last year, in fact having paid for my tesla with long calls.  However, I also thought the stock had run too far ahead of earnings and closed most positions leaving only a Jan15 42C/May 75 spread open.  So I've also been shocked and awed by the move, fortunately not to the point of any losses (yet).
     
    There are so many intangible and unpredictable factors to valuing TSLA, and there have been many articles arguing both sides, but I'll share my things to consider:
     
    1.  This car has the simplicity of design that very rarely comes along.   It really is simply a battery, a 4G-connected computer (with a 17" display – and yes I've already been caught reading emails and PSW while driving, lol) and a big inductor motor with a few servos, fuses and pc boards.  That's it….almost no moving parts to break or wear out.  Take a look at a the chassis in one of their stores and you'll see what I mean.
     
    What this really means is that this car and the platform was designed to be very easy to build and support.  This means scaling should not be compared to traditional auto company scaling business models.  The ecosystem/supply chain is very different.  The hard part (design) of the platform is done, the moat (patents) is cast and the fortress (factory) template is being optimized right now.  Yes, the supply chain will need more work, but this is more like scaling an iphone – all the value add is in the design, not production.   Does anyone really think TSLA will have a problem raising capital to build more assembly centers?  I think not.
     
    2.  The traditional auto companies have been burned on every effort to change their propulsion model, whether it be hybrids, electrics, etc.  A lot of money spent, but not well and one can argue they did not have the commitment to succeed – only to satisfy regulators.   Look at the Chevy Volt, the money spent, the time involved in design, the price of the car, the 'intelligence' of the car and the resulting sales: fail.  Even Toyota has not been able to grow Prius sales beyond the niche of greenies.  
     
    This is why telsa IS disruptive, and now has broken into a clear run for the goal line.   They have the design instincts, human capital and nimbleness of a classic silicon valley start-up.   Kind of what GM wanted with the acquisition of EDS a long time ago, but how did that work out for them?   Even Toyota does not have the culture to drive this transition to electric cars conceived as a mobile, digital platform – the more they spend the more they will lose and the more validated the disruptor becomes.  Classic Christensen disruptive innovation…google it.
     
    3. Sales will accelerate beyond expectations outside of US.   Europeans have much more to like about Tesla cars than Americans – higher fuel prices and shorter travel distance requirements and more supportive governments/regulators.  Of course, not everyone can afford a Model S (although one can argue an affordable luxury @about $570/mo in the US on lease and about $400/mo in Europe). If you think this will be the last car TSLA makes then go ahead and short the stock.  However, the Model X SUV is already designed (with cool gull-wings) and the Gen III design is active ($40K sedan with 500 mile range).  Umm….short if you don't think they know what they are doing, or if someone won't buy the vision or fund the capital, or if you don't think they will be the first movers on this innovation.
     
    4. Elon Musk is in the process of becoming the new age Edison.  He's already made the money and is motivated by solving the worlds' big problems.  Do you think the CEO's of Ford, GM or Toyota are wired or motivated that way?  He may be a little loose, not unlike the old Steve Jobs, but you really have to ask yourself a couple of questions:   Are electric cars a fluke or fad?  If you think yes, then stick to your bikes and zip cars and I can't help you.  If no, then what horse are you going to bet on?   My bet is on the one with no legacy costs, unions, cultural and competence impediments and vested interests within their firm who do not want to lose their position and power by encouraging the demise of the ICE.
     
    These points are for those who are shorting out in 2015.  I do think and actually hope that TSLA comes in from 80 after the current shorts cover.  I have May 75 covers that I'm managing and would love to see the stock get back to the 60's.  But this has become a cult stock and now the general public has latched onto it.  What other car has achieved Motor Trend Car of the Year, and Consumer Report's 99/100 score?  None.   They will be many trying to play the 'buy the car, pay with stock gains' game, which I can't put down because it did work for me, but I wouldn't try it now.   I'm just making the point that there will be many drivers of stock demand – rational and irrational.  And I don't think this will be the last wave of short covering (especially seeing the comments on the board).   Just remember that irrational is indeed irrational, but it is also real and can last for a long time.
     
    I've seen this movie before, namely AMZN in the early 2000's when no one could believe the stock valuation based on traditional valuation metrics.  Even still to this day.   It still surprises me that people buy the vision story without regard to valuation, but it happens over and over again.   Looking at the long-term AMZN chart from 1998 until now is evidence that scalable digital business models can defy gravity for a very long time.   Things happen much faster now, so AMZN's chart performance curve for 10 years may only take 3 years for TSLA.    In fact, I think a good pair trade would be Long TSLA/Short AMZN LEAPS, playing the momo's against each other.
     
    I've had my share of covers and hedges blow up on me and the only repair left is to roll way out and say a prayer.  And of course, with unlimited time and margin, selling premium can fix most surprise gaps up and down.   I'm just saying that TSLA in 2015 is a very uncertain and risky play, mainly due to the irrational factors that defy gravity – witness AMZN.



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Phil's Favorites

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This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

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