Michael Burry and Elon Musk have a lot in common. Burry is considered a legend to many and an imbecile to others. Much the same can be said about Elon Musk. While both sport clear signs of genius and contempt for authority.
But the two are not friends and now that Burry has taken to shorting Tesla’s (NASDAQ: TSLA) stock, it’s unlikely they ever will be.
Burry buys Tesla put options
It’s been reported that Michael Burry has recently purchased a vast number of put options in Tesla stock. This means he’s betting the share price will fall and he will profit handsomely if it does.
The reason this is a big deal, is that it’s not the first time he’s delved into an untouchable market and ultimately won. The Hollywood movie ‘The Big Short’ is all about Burry’s journey in shorting the US subprime mortgage market back in 2007.
He was a laughingstock and almost caused his firm to go bankrupt, but in the long run he was proved right. This led him to make a considerable fortune while the US financial markets crumbled around him.
The Tesla share price has been the subject of countless articles, podcasts, social media messages, memes and satire for years now. Elon Musk is a household name, and the cars are both coveted and ridiculed.
The entire Tesla ecosystem is a phenomenon all its own and that’s why its share price journey makes such compelling reading. It’s been defying the odds time and again yet doubt in its future is never far from the surface. For all those participants and spectators, keeping an eye on the Tesla share price has become a part of daily life.
But so far, those betting against Tesla have not fared well. It’s almost riskier to go against the EV machine than it is to go long in fear of missing out (FOMO).
So why has Burry chosen to go into battle against Tesla now? What’s changed?
Timing is everything in the financial markets and the tailwinds that kept Tesla soaring last year appear to have disappeared.
It’s facing mounting issues from environmental criticism to the Bitcoin fiasco, to Elon Musk’s uncontrollable tweets, plus several under the radar issues with the vehicles themselves.
And Burry himself has previously discussed how relying heavily on carbon credits to make profits, will ultimately hurt Tesla’s long-term growth prospects.
How does Tesla profit from Carbon Credits?
Tesla’s entire ethos is built on saving the planet and raising environmental awareness. Therefore, it naturally has a good credit rating when it comes to its carbon footprint. Many other companies striving to meet their carbon goals simply don’t stand a chance.
So, a solution came about whereby Tesla sells its abundance of feel-good environmental kudos in the form of carbon credits. Buyers include rival automakers and government backed schemes.
The company has made a lot of money through the carbon credit process. In fact, it’s the only reason Tesla is profitable and consequently listed in the S&P 500.
In Q1 Tesla recorded $528 million worth of regulatory credit sales. These were from supporting renewable energy through government programs.
Meanwhile, Masserati owner The Stellantis Group was one of Tesla’s carbon credit customers. But the group recently ended the arrangement to forge ahead with its own environmentally friendly initiatives.
This is just one incident in a series of accumulating headwinds challenging the future of Tesla as a viable investment.
Tesla is no stranger to negative headlines but recent backlash against its driverless cars is damning. The crux of this stems from its decision to use cameras rather than sensors. Rival autonomous car makers are confident sensors are much more reliable and accurate.
Musk himself has been quite vocal in his disdain for using lidar sensors, but recent Tesla test vehicles appear to be using sensors after all.
Some video footage recently went viral on social media showing a Tesla Model 3 battery fire and various vehicle failures.
Just this week Tesla China filed a recall, for a total of 734 imported Model 3 vehicles, citing quality issues. The main reasons given appear to be the risk of loose screws and bolts. In extreme circumstances, this could lead to accidents.
But it’s not just happening in China. Tesla is also recalling 5,974 EVs in the US. This stems from concern their brake calliper bolts might loosen.
Tesla is also facing production delays due to microchip shortages. The global semiconductor shortage has been well documented in recent weeks.
While there’s a rush on to build US factories, the reality is it will take years to get up and running to the capacity needed. In the meantime, the chip shortages could continue for at least the next 18 months.
Hacking major companies is on the rise. In fact, ransomware hack attempts are so serious, the US is now giving them a priority level equivalent to terrorism.
Tesla is not immune to this danger and earlier this year its internal video feeds were reportedly accessed by a hacking group.
Chinese sales slip
While the company has a growing presence in China, it faces serious competition in the region. And early signs show it’s not been warmly welcomed. Musk is loved by many in China, but not so much by those in charge.
The Chinese state take privacy extremely seriously and Tesla’s use of cameras to record footage has them running scared.
As a result, military employees and staff at state-owned businesses are being told not to use Tesla vehicles. This is due to national-security concerns.
China’s President Xi Jinping, leader of the Chinese Communist Party (CCP) is on a mission to retain domestic control over technological advancements. There are literally hundreds of EV companies operating in China, so Tesla is up against serious competition.
Nevertheless, the Tesla Model 3 was the bestselling electric vehicle in the region in 2020. It sold over 138,000, according to the China Passenger Car Association. Plus, it generated $6.66 billion in 2020 revenues in China.
But sales in May declined adding fuel to the fire. All in all, it seems Tesla needs China more than China needs Tesla.
Back in February Tesla made history for the umpteenth time after adding $1.5 billion worth of cryptocurrency Bitcoin to its company balance sheet. This was applauded by some, but created outrage from environmentalists. That’s because they claim mining for Bitcoin does so much environmental damage, it will undo all the good Tesla is striving to achieve.
Nevertheless, Tesla also agreed to start accepting payment for EVs using Bitcoin.
The chaos came to a temporary conclusion in May when Tesla announced it had about turned on its decision to accept Bitcoin as a payment. We covered this in a previous article: Tesla’s Bitcoin about turn sends crypto assets plummeting.
Since then, Musk has continued to send shockwaves through the cryptoverse with tweet upon tweet relaying cryptic messages, possibly in favour of meme coins, potentially dissing Bitcoin and generally causing a good old stir.
The price of Bitcoin has fluctuated heavily during this time and it’s not clear whether Tesla still has the $1.5 billion on its balance sheet or if this has been sold off.
Trading Bitcoin in Q1, controversially helped secure a profitable quarter for Tesla. So, if it’s now completely removed all traces of Bitcoin the company will be back to relying on carbon credits.
The US Securities and Exchange Commission (SEC) has said Elon Musk’s tweets have twice violated a court-order requiring pre-approval by a Tesla lawyer. While Musk’s tweets have gotten riotously out of control this year, this latest declaration reflects badly on Tesla the company, rather than just the man himself.
In 2018 Musk paid a $20 million fine to settle an SEC allegation that he’d been manipulating the Tesla share price through his tweets. He also agreed to have future tweets supervised by Tesla lawyers.
Then in October that year he openly mocked the SEC again via tweet saying:
“Just want to that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!”
This was followed by an even more controversial one in July last year saying:
“SEC, three letter acronym, middle word is Elon’s”
In May last year, the SEC told Tesla:
“Tesla has abdicated the duties required of it by the court’s order.”
The number of controversial tweets Musk has now written could potentially fill a book and he’s easily stolen President Trump’s crown in this regard.
While Burry is undoubtedly a polarising character, many big hedge funds are quick to follow his lead. So, will his latest decision to buy Tesla Puts be the start as a flood of copy-cat investors follow suit?
Or will the opposite be true, and will they jump in on the long side if Burry turns out to be wrong?
It’s a nerve-wracking place to be investing, whichever side you’re on.
But there’s another reason funds need to be on their guard. Last year the stock market was on a tear and it seemed people could make money on any old stock. But the landscape has changed, and many 2020 highfliers are now losing money hand over fist.
For big funds like ARK Invest’s exchange-traded funds (ETFs) they are choosing to sell the funds highly liquid stocks to keep the less liquid assets afloat. ARK’s founder Cathie Wood is a staunch supporter of Tesla so if it were to sell a sizeable chunk of Tesla stock that would set the cat among the pigeons with a major retail selloff likely to follow.
With so many challenges coming at Tesla, it seems Burry has a good case.
If his latest Big Short proves right, there’s sure to be chaos in the markets once again. And we can probably expect a follow-up book and film too.