Stanphyl Capital discusses their short position in Tesla Motors Inc (NASDAQ:TSLA), in their letter for the month of August 2016.
For August 2016 the fund was up approximately 6.8% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 0.1% while the Russell 2000 was up approximately 1.8%. Year to date the fund is up approximately 20.2% net while the S&P 500 is up approximately 10.2% and the Russell 2000 is up approximately 8.3%. Since inception on June 1, 2011 the fund is up approximately 108.4% net while the S&P 500 is up approximately 80.7% and the Russell 2000 is up approximately 57.4%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.)
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; August close: $212.01), which in August reported yet another disastrous quarter, managing to lose (GAAP) $20,357 per car sold with negative sequential sales comps. Now, many bulls claim that Tesla loses so much money because it’s “investing for the future,” so let’s dispense with that claptrap right now…
First, even mature auto companies spend around 5% of revenue on capex. If we thus remove from Tesla’s Q2 GAAP loss the depreciation & amortization (as a proxy for capex) in excess of that, it still lost $12,044 per car. But what about R&D spend, which Tesla expenses while selling a relatively small number of cars?
Well in 2015, Porsche (Elon Musk’s “profitability hero”) spent approximately $10,800 in R&D per car sold, whereas in Q2 Tesla spent approximately $13,300, a difference of $2500 per car. So if we adjust Tesla’s capex as a percentage of revenue down to the industry average and adjust its R&D spend down to the level of Musk-hero Porsche’s, Tesla still lost $9544 per car in Q2 on a GAAP basis, and that was with its cheapest model starting at $70,000; i.e. good luck with a $35,000 Model 3! In other words, Tesla isn’t “a business”; it’s a cash incinerator.
Also in the Q2 earnings press release Tesla completely omitted any mention of its much-hyped battery backup business (and for good reason, according to the WSJ), and on the earnings call outright refused to update its equally hyped Model 3 reservation number (which of course in Tesla-speak means the number has gone either nowhere or down) and—in both the release and the conference call—failed to mention a surprise $411 million cash outlay to its convertible debt holders.
Meanwhile, Tesla clearly now faces slack demand for both its Model S and Model X, as it recently introduced a discounted leasing program and 60kWh versions of both cars. These new models are $8500 to $9000 cheaper than the 75kWh versions but come with the same expensive 75kWh battery, partially deactivated via software. Seeing as Tesla was already averaging massive per car losses, it will be really exciting to see what this does to the income statement beginning in Q3. At the same time, the company apparently has so much excess inventory (yes, Tesla does have “a production problem”—one of over-production) that it’s encouraging on-line buyers to take cars that are already built and heavily discounting brand new inventory (many cars with just 50 miles). And even for custom-ordered cars Tesla has now embarked on yet another worldwide discount program despite Musk’s explicit claim in the February conference call that “We do not discount our cars for anyone.” (Question for Tesla longs: how many times does a CEO have to lie to you before you realize he’s “a liar”?)
In June Tesla announced a “bailout buyout” of SolarCity, Elon Musk’s other cash-burning, bankruptcy-bound company, which in August posted a horrendous earnings report, showing annualized negative free cash flow (operating cash flow + capex) of approximately -$2.5 billion, meaning– as someone posted on Twitter– that the TSLA-SCTY deal is the equivalent of rats jumping from the iceberg to the Titanic upon impact. Of course, once the merger is completed and Musk has (at the expense of Tesla shareholders) preserved the value of his otherwise worthless $500 million in SolarCity stock, he may just shut downmost of SolarCity, letting it gradually disappear into the much larger sinkhole known as Tesla. (At least that’s what I’d do if I were a self-dealing CEO like Elon Musk.)
Meanwhile, in July Tesla admitted that despite knowing about a deadly crash in May caused by the failure of its much-hyped “autopilot,” it went ahead with a massive stock sale weeks later without making the incident public, thereby triggering an SEC investigation (and the SEC was already investigating Tesla for potential accounting violations prior to this, something Tesla—of course—never reported), while the NHTSA opened an autopilot investigation. Two more autopilot-related crashes occurred in July and then two more in August, totaling three of the four cars involved but, fortunately, leaving the passengers alive. (For three of those crashes the autopilot was on at the time of impact while for the fourth it supposedly shut itself off a few seconds before impact, thereby handing control back to the unprepared driver.)
Also in 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 mor
In late July Tesla hosted a completely phony “grand opening” for its so-called Gigafactory (to which Panasonic’s commitment is much less than is commonly believed) despite the fact that it’s currently only 14% of the size promised to the state of Nevada and Tesla’s shareholders & bondholders and not even close to producing anything meaningful 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-related financial projections, including a 25% (Tesla-defined & misleading) gross margin on a car costing half the 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 (not to mention the $411 million owed to the redeeming convert holders and the cash drain from the massive financial sinkhole known as “Solar City”), despite the fact that it raised nearly $2 billion in 2014 explicitly to build the factory and $1.7 billion in May 2016 explicitly to put the Model 3 into production. (On top of that $1.7 billion offering Musk personally dumped nearly $600 million worth of shares, supposedly only to pay the