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Elon Musk & Tesla’s Trajectory in a Possible “EV Winter”

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It’s easy to despise Elon Musk.

Between his over-the-top antics, his social media trolling and his company’s astronomic overvaluation, there’s something to offend just about everyone from Wall Street to Main Street.

As a result, his company Tesla (Nasdaq: TSLA) has attracted an army of short sellers that rivals his faithful followers in their size and conviction.

Famous short seller Jim Chanos spent years fighting an uphill battle and betting against Tesla shares.

Even Microsoft founder Bill Gates shorted Tesla shares over the last few years.

According to Musk’s biographer, Gates claimed Musk was “super mean to me” after he found out about Gates’ short position.

“But he’s super mean to so many people,” Gates continued, “so you can’t take it personally.”

Max Profit Alert subscribers know that I also recommended shorting Tesla shares via long-term put options.

Valuations seemed like they were simply too high to sustain. And the kinds of breakthroughs that Tesla permabulls were expecting — like Full Self-Driving (FSD) cars — simply weren’t happening.

Musk has been promising that FSD cars were “just a few months away” or “just a year away” ever since 2014 (there are even video compilations of Musk’s many promises).

Tesla’s short sellers raked in $11.5 billion in total profits as share prices crashed in 2022, after which Elon Musk went to the media and blasted shorts as “blood suckers” in true Elon Musk fashion.

At the same time, short selling can be very difficult.

Because in the immortal words of economist John Maynard Keynes: “Markets can stay irrational for longer than you can stay solvent.”

For now, the stock is back to booming — with one of the highest forward valuations of the “Magnificent 7” mega-cap tech stocks:

Meanwhile, Musk’s recent $44 billion investment in Twitter (now X) has lost more than half its value…

When Twitter’s advertisers began to question his content and hate speech on the platform, he told them to go do something that I won’t repeat in polite company.

And he’s now demanding that Tesla’s board effectively double his ownership stake in the company, or else he’ll “build products outside of Tesla.”

To a casual observer, it might seem like Musk is spiraling — and that the days of Tesla’s high valuations may finally be coming to an end.

But it’s not quite that simple…

The Bigger Picture for Musk and Tesla

Musk took over as CEO of Tesla in 2008.

That’s the same year that America’s last remaining domestic carmakers went to Washington hat in hand, begging for a massive federal bailout to keep themselves in business.

For decades, other companies had tried to market and popularize true electric vehicles (EVs). Every single time, they’d failed. Then along comes Tesla with its goofball CEO.

(From TheVerge: Musk hyped up obscure cryptocurrency dogecoin while hosting Saturday Night Live.)

But once again, this goofball CEO succeeded where every serious professional before him had failed.

The early Tesla Roadsters were based on old Lotus Elise chassis. And they were truly beautiful cars. But they weren’t practical for mass-market sales.

During the early years of Musk’s tenure, Tesla pivoted to deliver some truly breakthrough vehicles like the Model 3 and the Model X with its iconic gull wing doors.

These are the kinds of cars people love to own and drive (my colleague Charles Mizrahi drives one). As a result, the Model 3 broke into the top 10 list for America’s top-selling cars back in 2021. And sales have been outstanding ever since.

At the end of last year Tesla was on track for record vehicle deliveries — even though it fell short of Musk’s ambitious annual target of 2 million vehicles.

Love him or hate him, Musk and his company, Tesla, are leading the EV revolution.

He’s proven himself to be a true innovator over the years at both Tesla and SpaceX.

And even though we’ve seen numerous projects fall short, his next big breakthrough might be closer than you think…

Musk in Context

These days, Steve Jobs is lionized as a tech visionary.

If you asked any American on the street, they’d immediately associate him with the iPhone. Then maybe the iPod, and a few professionals might mention their MacBooks or old Macintosh computers.

But most of us forget about his early failures. And there were plenty. The Apple III was the company’s first massive flop. The Apple Lisa was a masterpiece of engineering, but it was also too expensive. It was also obsolete in less than a year, thanks to the release of the Mac.

Jobs’ failures (and his eccentric ego) put so much pressure on the board that he was removed of leadership from his own company.

He’d eventually return to deliver breakthrough after breakthrough later in his career. But it took decades for Jobs to mature as a leader — or maybe for the world to finally catch up with his vision—and achieve the level of success he’s now remembered for.

Even Bill Gates’ Microsoft spent tens of billions over the years on a laundry list of acquisitions that never went anywhere.

Likewise for Facebook founder Mark Zuckerberg.

Zuckerberg bet big on the Metaverse in recent years, and he lost big too. Since 2019, Facebook has lost over $46 billion on the Metaverse alone.

That’s more than the total revenue for Best Buy or United Airlines.

But when it comes to cutting-edge technology, that’s simply the name of the game.

Big success and innovation don’t come without taking big chances. And that means failure is more likely.

Most of the Magnificent Seven tech stocks are purpose-built for this kind of operation.

They pay limited dividends back to shareholders while keeping a massive war chest of cash to fund their endless innovation efforts.

At the moment, Apple alone has over $61 billion on hand, for example.

As long as the core business stays strong, as long as they can keep funding innovation, then these mega-cap tech stocks can keep evolving at a breakneck pace.

But what happens if Tesla’s core business (EV sales) starts to slow down?

Products vs Services

One of the most critical innovations for Magnificent Seven tech stocks since 2000 has been the development of service-based income.

Apple makes money when you buy its gadgets … Nvidia makes money when you buy a new graphics card … and Microsoft makes money every time you buy a license for Windows.

But these are all products. And product sales can be fickle, seasonal and subject to ever-changing consumer preference.

By supplementing these product sales with fee income from services, mega-cap tech stocks have succeeded in leveling out their income (at least somewhat). Apple earns a steady revenue from Apple Music. Google and Facebook can lean on ad revenue, and likewise for Microsoft has its cloud.

So even if a hot new release is delayed, even if a breakthrough turns out to be a flop, these companies can still count on that steady cash flow.

Tesla doesn’t really have that luxury. At least not yet.

Instead, it gets one big transaction every few years at most. Customers buy a car and maybe a Powerwall to charge it, and that’s it.

This could be part of the reason why Musk is asking a larger ownership stake and greater control over Tesla.

He’s already branching out into new technologies like artificial intelligence, with his startup X.AI, much like Amazon branched out from e-commerce into cloud computing with AWS.

New AI-based services could potentially add much-needed fee income to Tesla’s bottom line — helping stabilize the business enough to survive an “EV winter,” and disappointing a whole new generation of Tesla bears.

To good profits,

Adam O’Dell

Chief Investment Strategist, Money & Markets

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