Electric carmaker Tesla is rarely out of the news these days, its constant stock price gyrations attracting investors from both the long and the short side. Nonetheless, the company has been trying to prove that it is a solid investment and can weather any storm. Despite a 27.5% dip in the stock price between March 2 and March 25, at the same time as other stocks swooned in response to the COVID-19 pandemic, it was still up 25.3% year-to-date and had begun to recover, bouncing up by almost 23% from its lows.

Despite the stock’s wild swings, CtW Investment Group is a believer. “The business model is very attractive if the company is run by a mature board,” the union pension fund’s executive director, Dieter Waizenegger, told Activist Insight Online.

Tesla’s competitive advantage in the electric vehicle market has proved to be a point of optimism for many long investors. The company has been manufacturing 100% electric vehicles for twelve years, longer than other auto companies, and does not have to worry about also maintaining its combustion engine capabilities. Tesla is also continuing to grow its battery, solar, and autonomous driving divisions which could feed future growth.

“Tesla has not lost market share in the EV market and traditional autos have had a really hard time producing a car that’s on par with Tesla in terms of a dollar per performance or efficiency basis,” ARK Invest’s Tasha Keeney told CNBC last month. “We’ve also seen them scale Shanghai in less than a year which is incredible progress. They’ve proven that they can scale in a capital efficient manner.”

In a partly consumer-driven bull market, Tesla was practically the only short target in the consumer cyclical space between 2014 and 2018, accounting for 11 of 12 activist short campaigns in the sector, according to Activist Insight Shorts data.

Lies and statistics

In his monthly fund letter sent to Stanphyl Capital investors, managing member Mark Spiegel said he still considers Tesla “to be the biggest single stock bubble in this whole bubble market.” His arguments against the company begin with the absence of anything meaningfully proprietary in its technology and end with its CEO. “Elon Musk is a securities fraud-committing pathological liar,” he wrote.

Spiegel predicted that by mid-to-late 2020 the company “and its awful balance sheet will return to losing money” and noted that Tesla revenue fell 3% in the second half of 2019 when compared to the same period in 2018 and net income fell 45%. “Yet somewhere out there is a mass of idiots bidding this stock to the moon because they think it’s a ‘hypergrowth’ company.” Tesla’s peak price-to-EBITDA ratio, year-to-date, sat at 130 on February 19, it had fallen to just under 66 at March 31’s open – many times that of its peers.

A surging share price also caused Citron Research to revert from its long position and short the car manufacturer for a third time in February, with Andrew Left calling the company a “Wall Street casino.” After the stock climbed as high as $922 per share on February 4, Citron founder Andrew Left tweeted, “we believe even Elon would short the stock here if he was a fund manager.” Citron was previously short Mobileye, a former supplier of autonomous driving technology to Tesla which was bought by Intel for $15 billion.

The short seller had already released two reports on Tesla, both of which claimed Tesla’s success was the product of a market bubble. Other short sellers in the stock include Greenlight Capital and Kynikos Associates.

Boardroom mishaps

While CtW believes the company is still a good investment despite warnings of a bubble, the sometime activist does take issue with some corporate governance practices. The shareholder began publicly campaigning for improved governance in mid-2016 when it suggested the board become more independent, split the chairman and CEO roles, and de-stagger. The activist told Activist Insight Online that for several years, CtW has been pointing these issues out to “a board not able to put rails on the CEO who’s obviously usually very focused on the company but when he loses focus it’s a problem.”

According to Activist Insight Governance, there are fewer independent directors on the board than the Russell 3000 average.

The early challenges CtW outlined included board seats filled by Musk’s friends to eliminate accountability. The activist believed that the placement of Musk’s friends and family members also meant a lack of relevant experience in the boardroom in areas including regulatory experience, technology, and human capital management.

CtW also believes having the right corporate governance to keep the board focused on implementing its strategy is critical in the face of short sellers. Waizenegger noted that having differing opinions on the board is important and the activist is looking at the short sellers closely to understand what is going on, but questioned whether short sellers can maintain their positions in the face of the company’s progress.

Growing with governance

Tesla’s board is still staggered and includes Musk’s brother Kimbal, but the CEO and chairman roles have been split. Waizenegger told Activist Insight Online that CtW is watching how Tesla’s two-year plan, announced last year as part of a settlement with the U.S. Securities and Exchange Commission, will play out. As part of the agreement, two directors were replaced and two more that the activist has been concerned about will be removed this summer.

CtW still believes the board is missing manufacturing experience and could change at a faster pace. In the short term, it would like Tesla to detail its prolific use of non-disclosure agreements as a litmus test of how empowered the company’s workers are to speak out and whether whistleblower protections exist. By creating an environment in which grievances are passed on to management, less information may be passed on to whistleblowers and short sellers. “That’s an area of concern we have and here we think having an industry leader of technology stepping out and following the lead of other technology companies that use these things would send a very strong signal.”