Devonshire Research Group presentation on Tesla Motors discussing their short position in the stock.

Notice of investment interests in Tesla Motors

As of the publication date of this report, the Principals and Clients of Devonshire Research Group LLC have a net short position in the stock, put options, bonds, and credit swaps of Tesla Motors, Inc. and stand to realize gains in the event that the price of the stock “TSLA” declines over the long run, or if investment sentiment improves the appeal of an expected decline in any of its securities.

However, Devonshire recognizes that while the technology strategy of the Company reflects a long term bearish outlook for Tesla Motors, Inc.’s security instruments, the short term implication of powerful marketing, including the power of social media tweeting by the CEO and his PR firm, well orchestrated and heavily blogged product launches, and a deep and powerful short term media control and attention span, suggests unpredictable short term volatility.

Principals and Clients of Devonshire Research Group LLC are short term volatility oriented with a long term net short position across multiple security instruments.

On humility:

It is unwise to be too sure of one’s own wisdom. It is healthy to be reminded that the strongest might weaken and the wisest might err. — Ghandi

Executive Summary

  • What kind of company is Tesla Motors really? Few companies have ever managed such a broad scope of business models. Its valuation multiples (when they can be calculated) lie well above its direct business model comparables
    — TSLA is attempting more vertical integration than any auto company has recently tried
    — TSLA trades at a higher revenue multiple than any related technology business
    — TSLA’s only comparables in terms of multiple are business models that TSLA is not:
    — Software companies: TSLA has low / negative margins and heavy fixed asset commitment
    — Social media companies: TSLA has no network effects, no platform economics and high scaling costs
    — Biotech or oil explorations companies: TSLA has high marginal costs for every unit it produces
  • Tesla Motors has relied heavily on existing technology in designing a successful EV model, and while it may have generated some valuable IP it now controls little of it and has questionable sustainable competitive advantage in technology
    — TSLA’s patents cover battery-related technology and selected components but not battery cells
    — TSLA’s patent holdings are dwarfed by its technology competitors, limiting its freedom to operate in the EV market where its technology position is modest
    — TSLA’s engineering talent is thin relative to competitors and many productive inventors have left
    — TSLA’s valuable inventions can be readily copied by its EV competitors
    — TSLA’s cost position is heavily dependent on its bargaining positions with strategic suppliers who have an incentive to price aggressively for their advanced technologies
  • Tesla Motors is not the green company it claims to be, with environmental risks at all stages of the vehicle lifecycle
    — TSLA battery production requires the mining and use of numerous toxic chemicals
    — TSLA EV production has a heavier carbon footprint than traditional vehicles
    — TSLA vehicles consume lots of energy; battery charging shifts CO2 emissions from car engines to power plants
    — Disposal of TSLA batteries at large scale will create a heavy toxic burden

Tesla wears many hats–does this large scope of functions justify its “disruptive” reputation and corresponding market cap?

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Tesla is currently trading at a 7.0x revenue multiple–far above any comparable except, at the extreme, a high-flying software company

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By valuation multiples, Tesla is comparable to a social media giant–except that it lacks network effects or serious user traction

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Broadly speaking, Tesla’s multiple places it among industries that rely on speculative future windfalls; true comparables lie far below

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See full slides below.