Tesla short-sellers have swung back to the SolarCity side of the business. Here’s why.

Elon Musk shows off Tesla's solar roof.

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Elon Musk shows off Tesla’s solar roof.
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Tesla

For years now, Tesla has a been a battleground for short-sellers. At times, they’ve made money; but they’ve also lost money, most recently when Tesla posted a surprise third-quarter profit and the stock rocketed back above $300.

Tesla shares are volatile, but so are short-sellers attention spans. For much of the past two years, their focus was on Tesla’s automotive business, and that made sense. Even today, automotive revenues are the vast majority of Tesla’s topline, at over $14 billion year-to-date, while the energy business has kicked in just over $1 billion.

Through three different vehicle programs: Model S, Model X, and Model 3, Tesla had demonstrated an enviable ability to generate massive buzz and sign up customers. But when it came to actually building and delivering cars, Tesla struggled. The modern auto industry is very much about manufacturing processes, but Tesla didn’t want to follow any leaders. CEO Elon Musk’s ego got in the way of smooth execution on this front.

Short-sellers smelled blood and moved in, knowing that the cash-intensive nature of the car business would weigh on Tesla’s ability to post profits and raise capital. Some big names – Jim Chanos, David Einhorn – started making media noise, arguing that Tesla was headed for bankruptcy.

Musk didn’t help Tesla’s cause by entering a chaotic period in which he sought to take the company private, failed, and had to submit to an SEC investigation and pay millions in penalties, forfeiting his chairman title in the process.

A stabilized car business sends short-sellers looking for weakness elsewhere

The Tesla Model 3.

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The Tesla Model 3.
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Hollis Johnson/Business Insider

However, following earnings results from Q3 2019, Tesla looks as though it’s stabilized its Model 3 operations and can move on to the next challenge, launching its Model Y crossover. (Revenues appear to have leveled off after reliably expanding by about million per quarter, but the company would probably exchange revenue growth for steadier profits, and in any event the balance sheet now has over $5 billion in cash with only two months left in 2019, an historically unusual situation for Tesla.)

Shorting Tesla based on a negative view of a car business that’s grown from less than 50,000 in yearly sales to almost 250,000 in 2018 or probably 300-400,000 in 2019 is, to borrow a phrase from the chess world, a busted position.

That’s why shorts have zeroed in on solar. For the record, I thought that Tesla’s 2016 merger with SolarCity – Musk was chairman, his cousin Lyndon Rive was CEO, and his brother Kimball was on the board – was a terrible idea. My main concern was that Tesla would be adding SolarCity’s rather weird debt-load (it was based on long-term solar-panel leases) to the balance sheet at a time when Tesla needed resources to launch Model 3.

There really isn’t much point to sugarcoating the SolarCity reality at the time, which is that it was headed for insolvency. Chanos had already bet on this via a short position that he took in 2015; the merger snookered that, and Chanos moved on to making Tesla his most talked-about position.

Musk now has some shareholders alleging that the SolarCity merger involved fraud and self-dealing, a question for the legal system to sort out. From a Tesla investor point of view, the negative aspects of the merger were oversold: the stock tanked in late 2016 but by mid-2017 it was surging toward record highs, nearing $400. The long consensus was that all the worry about SolarCity created a terrific buying opportunity.

Always being right but losing money anyway

Musk speaking before the Tesla-SolarCity merger.

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Musk speaking before the Tesla-SolarCity merger.
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Thomson Reuters

The tendency of Tesla to reward long investors – the stock is up over 1,200% since the company’s 2010 IPO – is both frustrating and addictive to short sellers. After all, the stock is up … 1,200% in less than a decade, and during that time Tesla has never posted an annual profit. Hence the addiction.

But what about the frustration? Well, as I noted in 2017:

The shorts have always been right about Tesla, but it hasn’t mattered. They were right when it was just a car company selling a tiny number of cars and making no money. They were right when it became an energy storage company. They were right when it rescued SolarCity.

GRRR! Few things are worse on Wall Street than always being technically right while still losing money.

If long investors are sort of like grand military strategists, surveying financial continents and deploying forces to hold ground and avoid conflict, short sellers are more like guerrilla tacticians, flitting from skirmish to skirmish, savoring the melees. Any weakness is a target.

With Tesla’s automotive business now as strong as its been in the company’s history, the weak point is now obviously solar. To the markets, that business is as irrelevant as its ever been; despite the foolhardiness of the tie-up, Tesla shares have consistently unyoked themselves from the SolarCity burden, and in any case, Tesla hasn’t exactly poured money into growing SolarCity (quite the opposite, in fact, as Musk has admitted Tesla borrowed staff from SolarCity to get the Model 3 out the door).

As fas as I’m concerned, Tesla solar is basically a nothingburger and I half-expect Tesla to wind it down once it figures out a way to get the debt off its balance sheet. But naturally, Musk, a committed solar booster, has shown himself to be overly sensitive to short-sellers, poking Einhorn after the guy complained about Tesla in his Q3 investor letter (and, pointlessly, inviting Einhorn to tour Tesla’s facilities when Einhorn appeared in his letter to suggest that Musk should face prosecution).

Interestingly, the short attack on solar has taken what was an invisible business and brought it back into the picture. This could actually improve Tesla’s solar fortunes. But that’s always a risk in guerilla warfare: assault a weakness enough times and you could inadvertently transform it into a strength.