Elon Musk Offers Short Sellers An Overlooked Argument Against Tesla

Elon Musk is surprised.

Benzinga · 02/05/2020 13:01

Elon Musk is surprised. For as thorough and aggressive as Tesla Inc (NASDAQ: TSLA) short sellers are, they’ve overlooked what he considers the most compelling argument against Tesla’s potential.

Musk offered this position during a recent podcast appearance with Third Row Tesla:

“Incumbent car companies make most of their money from selling spare parts to their existing fleet at high margins, and they’ll sell the new cars at a de facto zero margin or even at a loss...If you are a new company, you do not have a fleet, so you have no fleet with which to subsidize the sale of your new cars. This is the primary reason there has not been a successful car company startup in the United States.”

Musk estimates about 10% of Tesla vehicles are currently out of warranty compared to 80% of Ford Motor Company (NYSE: F) or General Motors Company (NYSE: GM) vehicles. The few Teslas that are out of warranty need less servicing because of their electric nature.

Carpe Diem

“This [fleet-model inertia] is a very difficult thing to overcome,” Musk said. “In order to overcome it, a car has to be significantly more compelling than other vehicles such that people are willing to pay a premium… otherwise, there is no chance.”

Tesla is seizing its chance by crafting a role within two key industry themes.

“In order for a car company to be successful, it has to succeed on two fundamental technology discontinuities: one being electrification, the other being autonomy,” Musk said, noting that electrification alone is not enough. “The combination of those two is the only opening for a new car company to make it.”

Tesla shares have been on a tear in recent months, moving from the $255 level in late October to the $860 level today. The stock started 2020 trading around $430.

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