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Tesla – the Marmite of stocks

Love it or hate it, exposure to pioneer electric car maker Tesla, described by GraniteShares as the ‘Marmite of stocks’, can be exacerbated by use of the GraniteShares 3x long or 3x short London Stock Exchange listed ETPs

Will Rhind, GraniteShares founder and CEO, has written a note on Tesla’s somewhat unexpected results published this week, revealing, a second-quarter GAAP profit of 50 cents per share versus analysts’ consensus expectations of a loss of USD1.06.

“Depending on which view you take, the official expectation was for them to pose a 3 cent profit and many thought a loss, which played into the bears’ hands,” Rhind says.

While it’s difficult to see who exactly is buying the ETPs, long or short, Rhind noted that coming into the earnings announcement, they were selling six times the amount of shorts to longs.

Part of that might be a hedging technique: Rhind also reports enquiries from holders of the Baillie Gifford flagship investment trust, The Scottish Mortgage Trust, which has Tesla as its number one holding at 12.7 per cent of the portfolio.

“People might be thinking the share price has gone too far,” Rhind says, but Tesla continues to confound sceptics, despite comments from CEO Elon Musk who commented on the results, saying: “We want to be, like, slightly profitable and maximise growth and make the cars as affordable as possible, and that’s what we’re trying to achieve.”

The company earned a profit of USD104 million during the quarter, compared to a loss of USD408 million for the same quarter a year ago.  

Rhind says: “What he’s trying to say is, it’s an efficiency game and he is trying to drive efficiencies through his manufacturing process, to lower the price of cars. Increasing their market share and profitability is a function of that but not his number one concern.”

Tesla’s USD300 billion market cap is now more than all the US car companies put together and makes them bigger than Toyota.

After the results announcement, the Tesla share price rose so much that it added the equivalent of the market capitalisation of Ford in one day.

However, he has attracted the attention of many a short seller from the hedge fund space, with a comprehensive Twitter feud with Tesla bear hedge funds that have shorted his stock. His spat with Greenlight Capital’s David Einhorn resulted in actual short shorts, a line of real Tesla red satin shorts that have sold out but possibly waved a flag that Musk had, as Rhind puts it, ‘a trick up his sleeve’ with better than expected results.

“He needed four quarters of profitability to get into the S&P 500 and now he has done it,” Rhind says. “This means that every fund has to buy you if you are benchmarked to that index.” 

However, it is not all plain sailing for Tesla. To maintain its advantage, it has high running costs and must spend heavily on R&D, all of which impacts on the bottom line and margins, Rhind writes. This is particularly true now as it is investing heavily to increase production capacity and boost sales. Tesla also has a large amount of debt that could adversely affect the performance of the share price.

However, next time the S&P rebalances, Tesla will be in there but Rhind strikes a note of caution. “History shows that a company entering the S&P peaks in the 12 months after entering and then goes down, so it will be interesting to see how long this lasts.”

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