Stanphyl July letter to investors – short Tesla Motors Inc. (NASDAQ:TSLA)
For July 2016 the fund was down approximately 3.3% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 3.7% while the Russell 2000 was up approximately 6.0%. Year to date the fund is up approximately 12.5% net while the S&P 500 is up approximately 7.7% and the Russell 2000 is up approximately 8.3%. Since inception on June 1, 2011 the fund is up approximately 95.0% net while the S&P 500 is up approximately 80.5% and the Russell 2000 is up approximately 54.6%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two.
In addition to our SPY and BNDX shorts we remain short what I believe is the market’s biggest single- company stock bubble, Tesla Motors Inc. (ticker: TSLA; July close: $234.79), which really jumped the shark in June when it announced a “bailout buyout” of Elon Musk’s other cash-burning, bankruptcy-bound company, Solar City (ticker: SCTY). Rather than laying out here the absurdity of this proposed transaction (which Musk apparently believes will be approved), here’s a terrific summary from newconstructs.com.
Following the June SCTY announcement, July was a multi-faceted disaster for Tesla (except, unfortunately, for its stock price!), kicking off with a huge Q2 delivery miss with negative sequential and annual sales comps for its mainstay Model S. (The quarter’s record financial losses will be reported in August.) Roughly concurrent with this, Tesla admitted that it knew about an early May deadly crash caused by the failure of its much-hyped“autopilot” but went ahead with its massive stock sale weeks later without making the incident public. And then at least two more autopilot-related crashes occurred, totaling both cars involved
but fortunately leaving their passengers alive. (For one of those crashes the autopilot was on at the time of impact, while for the other it supposedly shut itself off a few seconds before impact, thereby handing control back to the unprepared driver.) As a result of these incidents, the SEC opened an investigation into the non-disclosure before the May stock sale (and reportedly was alreadyinvestigating Tesla for potential accounting violations prior to this, something Tesla—of course—neverreported) while the NHTSA opened an autopilot investigation with a highly detailed nine-page information demand letter and a U.S. Senate committee is also looking into the incidents.
Then in mid-July Musk published a much-hyped (in anticipation) single page vision of where he wants to take Tesla in the future. Unfortunately for him though, Tesla is far behind deep-pocketed competitors in nearly every facet of this vague and unfinanced “plan,” something easily discerned by conducting a simple Google search on each of his stock-pumping buzzwords. Here’s one example,here’s another and here’s a third. I could easily post twenty or thirty more.
In late July Tesla hosted a completely phony “grand opening” for its so-called Gigafactory, despite the fact that it’s currently only 14% of the size promised to the state of Nevada and Tesla’s shareholders & bondholders and, appropriately enough, even showed off a completely phony Model 3 there. And of course at said “grand opening’ Musk made sure to spew out several nonsensical Model 3-relatedfinancial projections, including a 25% (Tesla-defined & misleading) gross margin on a car costing halfthe price of its current cars on which the (Tesla-defined & misleading) gross margin is only around 20%. Also at said “grand opening,” Musk admitted that Tesla will soon need to do yet another capital raise to finish the factory and get the Model 3 into production, despite the fact that it raised nearly $2 billion in 2014 explicitly to build the factory and $1.7 billion just nine weeks ago explicitly to put the Model 3 into production; in fact, that $1.7 billion will barely cover six quarters of operating losses before any additional capex (or Solar City) spend whatsoever. (On top of that $1.7 billion offering Musk personally dumped nearly $600 million worth of shares, supposedly only to pay the taxes on his option exercise but few things said by Musk can be taken at face value and apparently this wasn’t one of them.) Meanwhile, Tesla will now buy some of its energy storage batteries from Samsung and Roadster replacement batteries from LG, so much of the hype story surrounding the cost advantages and proprietary nature of the Gigafactory is just that: more Tesla hype. But in case Tesla does in fact still intend to pour billions of (freshly raised) dollars into that white (or perhaps I should say “red,” as in “red ink”) elephant, here’s an excellent dissertation on how stupid that would be.
Tesla Model S vs BMW i8 Bas Fransen, Flickr Creative Commons
Meanwhile, Tesla is clearly having serious demand issues for both its Model S and Model X. In June–recognizing the huge looming second quarter delivery miss and desperate to meet delivery guidance no matter how much money it loses– Tesla introduced a 60kWh Model S that’s $8500 cheaper than the 75kWh version but comes with the same expensive 75kWh battery, partially deactivated via software; it then did the same thing in July for the Model X. Seeing as Tesla already averaged GAAP losses of over $19,000 per car in Q1 (and they’ll almost certainly be higher for Q2), it’s going to bereally exciting to see what this does to the income statement beginning in Q3.
As for the potential profitability of the Model 3, in Q1 (as noted above) Tesla averaged a $19,000+ GAAP loss on every Model S it sold despite a starting price of $70,000 and an average price that ran much higher. So how does anyone with a brain in his head think this company can make money selling Model 3s—even if they’re 20% smaller than the S—starting at $35,000? I sure didn’t when I first wrote about this over two years ago and more recent analysis reinforces that conclusion andUBS—the only large sell- side firm not conflicted by Tesla investment banking business—agrees. And while we’re at it, here’s yet another great article about the Model 3. As we’re short the stock, I actually