Tesla Inc (NASDAQ:TSLA) CEO Elon Musk recently commented that short-sellers are “jerks who want us to die,” so now apparently, JPMorgan analysts are acting like jerks. They advise investors to short Tesla Inc stock because it’s set to plunge 40% over the next year.
Short Tesla Inc stock for 2018
In a note on Friday, JPMorgan analyst Ryan Brinkman advised investors to short Tesla stock and bet against the company because he expects it to disappoint further on the Model 3 ramp. He noted that 2018 brings a number of important milestones for ramping production of the Model 3, and he believes Tesla will struggle to meet those milestones, especially based on “its substantial miss to volume targets in 2017.”
Competition is also a key part of his advice to short Tesla stock. Brinkman expects competition from traditional automakers to become more of a threat as they start looking for ways to benefit from government subsidies. He’s particularly concerned about competitors that price their electric vehicles without even intending to turn a profit on them.
Of subsidies and tax credits
The concern is that traditional automakers may simply aim to sell enough EVs to subsidize the rest of their vehicle portfolios—cars, trucks and SUVs with internal combustion engines—”from a legal and regulatory compliance perspective.” Brinkman questions how Tesla can manage an EBIT margin that’s even at the industry average while trying to compete with EVs that are priced for losses. He rates Tesla stock at Underweight with a price target of $185, which suggests 40% downside.
Another issue Tesla will most likely face next year is the end of the federal tax credit for U.S. buyers. The tax credit is complex because it begins to phase out after the company delivers its 200,000th vehicle. Those who take delivery of their Tesla starting at the beginning of the quarter after the quarter in which Tesla delivers car #200,000 won’t get the full $7,500 credit.
Because of how the company does things, it will start getting tricky for buyers to know how much of a tax credit they will be eligible for before they take delivery of their Tesla. This is an even bigger issue for the more affordable Model 3 because it targets a more price-conscious buyer than the Model S or Model X.
Is the tide turning for Tesla short-sellers?
The advice to short Tesla stock may seem like a bold call even for those who are bearish on the automaker. Betting against it directly hasn’t been turning out very well for short-sellers, even though it comes up short of expectations or timelines regularly. Some analysts who are bearish still don’t advise clients to short Tesla stock. However, there have been plenty of others who aren’t afraid to bet against the EV maker. For example, well-known short-seller Jim Chanos said last month that he has been adding to his short all year.
Tesla stock has been a momentum play that keeps inflicting pain on short-sellers, although this could be changing. Even though the stock is in the green year to date, it has plunged since September, losing one-fifth of its value since its record high then, according to CNBC. Data from financial analytics firm S3 Partners indicates that Tesla shorts have recovered $890 million of what they’ve lost on their positions.