Tesla short-seller goes long on TSLA: “The story has become too compelling to ignore”

Tesla stock (NASDAQ:TSLA) is up more than 5% on Tuesday’s intraday amidst news that prominent activist short-seller Andrew Left of Citron Research, who currently has a lawsuit against Elon Musk over his “funding secured” tweet last August, has gone long on the electric car maker. In a recent note published on Tuesday, Citron noted that it is reversing its opinion on Tesla because the company’s story has “become too compelling to ignore.”

Citron Research states that while mainstream media had been largely focused on Elon Musk’s “eccentric, outlandish and at times offensive behavior,” it has failed to notice that the auto industry is currently being disrupted by Tesla, particularly the Model 3. Left notes that simply speaking, “Tesla is destroying the competition,” as shown by the dominance of the Model 3 in the United States’ midsize luxury car market and the Model S’ reign in the large luxury car segment.

“It is in that spirit, and with a great deal of analysis and due diligence that we can say for the first time, Citron is long Tesla as the Model 3 is a proven hit, and many of the TSLA warning signs have proven not to be significant.”

A key driver of Citron’s turnaround for Tesla is the lack of legitimate competitors in the premium electric car segment. In his classic bold fashion, Left noted that when it comes to electric vehicle sales in the United States, “it looks like it is the competition that is taking the Ambien.” Citron further stated that a deep dive into vehicle sales data reveals that the Model 3’s demand is new this year, and that it’s pulling directly from Tesla’s competitors. Left also pointed out that the declining sales figures of Tesla’s competitors at a time when the Model 3 is being ramped show that consumers seem to be moving away from legacy brands.

“People who are making their current car choices are moving away from other brands. – It is not just pent-up demand from people on the reservation list. If it were pent-up demand, those car classes wouldn’t be exhibiting such sharp declines year over year. TSLA is not just pulling customers from BMW and Mercedes but also from Toyota and Honda. Like a magic trick, while everyone is focused on Elon smoking weed, he is quietly smoking the whole automotive industry.”

Ultimately, Citron Research notes that it would not wish to be short TSLA at this point in the company’s history. Even if Tesla does not meet its profitability goals this Q3, Citron states that the company’s Gigafactory 3 project in Shanghai, the impending entrance of the Model 3 to the European market, Gigafactory 4 in Europe, the upcoming Tesla Semi and Model Y, and the rollout of the company’s first autonomous features with later iterations of Software V9, could allow the electric car maker to be added to the S&P 500 sometime next year.

Apart from the dominance of Tesla’s electric cars in their respective segments, Left also states that recent moves by the company’s largest shareholders suggest confidence in TSLA’s future. Among these are T Rowe Price, Baillie Gifford, and Fidelity — all of which are sticking with the company despite the controversies surrounding Elon Musk. T Rowe Price even increased its stake on Tesla in Q3, buying 5.5 million shares last quarter.

“Tesla is dominating the industry with no advertising, no unions, no dealer network. Tesla has the most miles driven data by several orders of magnitude. No tequila, flamethrowers, or short shorts- just a revolution in the transportation industry.”

Citron Research points out that it is still pushing through with its case against Elon Musk over his “funding secured” tweet last August. Nevertheless, Left admitted that while he is not a fan of Tesla’s “overconfident CEO, (Citron) cannot dismiss what we are seeing in the marketplace.”

Tesla has been showing signs that it is hitting its stride with the Model 3 production ramp — an endeavor that has cost the company and its CEO greatly. The company’s struggle to bring the Model 3 to market — aptly dubbed by the CEO as “manufacturing hell” — has been described by Elon Musk as one of the most painful and difficult experiences he’s ever had in his career. Tesla appears to have hit its stride in Q3, though, producing a total of 80,142 electric cars including 53,239 Model 3, as well as delivering a total of 83,500 vehicles, comprised of 55,840 Model 3, 14,470 Model S, and 13,190 Model X.

Since then, Tesla has been exhibiting signs that its production ramp for the Model 3 is going smoothly. This October has seen multiple large batches of VIN registrations this month so far, and the company has also unveiled a new variant of the Model 3 aimed at more budget-conscious reservation holders. Tesla has also announced that its Q3 2018 earnings call will be held this Wednesday, October 24, 2018, at 3:30 p.m. Pacific Time (6:30 p.m. Eastern Time). As noted by Citron in its note, the last time Tesla held an earnings call on an October, “revenue beat the consensus by 21%.”

As of writing, Tesla stock is up 5.85% at $276.22 per share.

Disclosure: I have no ownership in shares of TSLA and have no plans to initiate any positions within 72 hours.