MorningWord 4/4/16: You Do Talk About Your $TSLA

by Dan April 4, 2016 9:37 am • Commentary

Since Tesla (TSLA) started taking pre-orders for their mass market electric vehicle, the Model 3, late last week, the company has said that more than 276,000 people have plunked down $1,000 for the right to buy the $35,000 car (delivered late 2017, more likely early 2018). As my Options Action co-panelist Mike Khouw pointed out on Friday’s shows, Elon Musk just crowd-sourced a nearly $300 million (and growing) no interest loan from TSLA fanboys. For a company who saw its cash position go from $1.9 billion at the end of 2014 to $1.2 billion at the end of 2015, that is not an insignificant amount of money, especially when you consider all the balls that the company has in the air at the moment, rolling out Model S to the globe, going into mass production of the Model X, completion of their battery “Gigafactory” and on time and flawless development of the mass market vehicle that will likely make for more deliveries in its first year than the company has delivered all of its previous models to date.

Personally, I am rooting for Elon Musk because of the need to transition how we power transportation. And if there is anyone who can help the masses realize the benefits to electric vehicles, it’s Musk.  But the stock itself is a different story. On Friday in this space I offered some thoughts on the Model 2 unveil (here) I detailed an options strategy that plays for a re-tracement in the shares back towards $210 (here) in the coming months and discussed on Options Action:

This morning the stock is up $10, or 4% in the pre-market on the latest tally of pre-orders, equaling $10 billion if futures sales.  I think it is important to note that if TSLA were to recognize a good chunk of these sales in 2017, then you probably get to an annual revenue rate of 5 percent of General Motors and Ford’s $290 billion in combined sales in 2015.  Assuming a big chunk of those cars are sold in the U.S., they will equal less than 5% of the 5.6 million cars the two companies sold in the U.S. last  year.

So I am not hating on Tesla, Musk or the Model 3. Honestly, if I didn’t live in New York City (where charging is a problem for now), I’d probably plunk down the grand to reserve one. Assuming that the Model 3 that I would buy would cost about $40,000, I would be buying an in the money call option that expires in a year and half, non-trade-able or transferable, but converts into equity and is just 2.5% of the underlying car price.  That’s not an unreasonable premium to pay for the right to talk about your Model 3 with anyone who will listen for the next 20 months.

My view on the stock is that (like Friday’s open) it finds a little resistance just above the $242 level (where the company issued 3.1 million shares in a secondary offering last August). But I’ll keep an eye on it to see if it can holds and closes above that level and make sure it doesn’t get away from my strikes right off the bat.

But I would add that if people were aware of the Model 3 unveil in early February when the stock was below $150, and they are buying here at $240… after the event, then as my Twitter friend @NorthmanTrader likes to say, they are trading backwards.