Pabrai Investment Funds owns Fiat Chrysler Automobiles stock and General Motors Class B Warrants and highlighted those investments in the most recent investor letter. But perhaps the most interesting commentary in the letter, which was reviewed by ValueWalk, wasn’t what he said about those two automakers. It was what he had to say about Tesla Motors.
Tesla’s cars are “awesome”
Mohnish Pabrai, Managing Partner of Pabrai Investment Funds, explained in his July 14 letter to investors why he thinks Tesla, one of the most-watched auto stocks on the market, is not a threat to Fiat Chrysler or GM any time soon. He penned a lengthy section on electric vehicles and the possibility that they might become a headwind for the two automakers. However, he doesn’t believe they will be, at least not within the timeframe his funds are “likely to own these stocks.”
He does like Tesla’s cars, saying that the automaker makes “awesome cars” and adding, “I love Elon [Musk].” He called Tesla’s CEO “a one-in-a-billion human being,” but he believes that it won’t be long before the industry clones everything Musk comes up with. He notes that GM is beating Tesla to the punch with a mass market long-range pure EV. The Chevy Bolt is expected to land on the market in high volumes a year or two before the Model 3 is released. It will also be priced lower than the Model 3, plus consumers can still get the $7,500 federal tax credit with the Bolt, although the Model 3 will not be eligible.
“In the next five years, I expect there to be at least ten Model 3 clones on the market,” Pabrai wrote.
Tesla is wasting money
He also addressed the fact that the company has been losing so much money. He believes that Tesla is only wasting money on some of Musk’s ideas. Indeed, if the automaker didn’t do all of his ideas, there’s a chance it would be profitable. Pabrai specifically names the Supercharger network and Tesla’s “ill-fated attempt to swap out batteries” as “a waste of capital.” He compares the Supercharger network to GM or Ford building a gas station network in the 1930s because cars run on gasoline.
He pointed out that Tesla’s cars can travel more than 200 miles on a single charge and that this distance is plenty of range for the vast majority of drivers because they can charge at night while they are at home. If the need for a public charger network arises, Pabrai says capitalism will go to work and entrepreneurs will build one. Another possibility is that gas station owners will add charging stations to their businesses.
The fund manager also pointed out that drivers are loathe to go out of their way to fill up their cars, often not even by a mile. Even after Tesla’s Supercharger network is complete, there are still going to be gaps that will require detours, but he doesn’t think drivers will be willing to go the extra mile.
“Another dumb idea”: the Gigafactory
Pabrai also doesn’t think much of Tesla’s Gigafactory plan. He calls it “another dumb idea” that the automaker is “blowing billions” on. He notes that GM has a Gigafactory in South Korea which is owned by its partner LG Electronics. LG is on the hook for the capital expenditures associated with the facility – not GM. In other words, he seems to think Panasonic should be footing the bill for the capital expenditures for Tesla’s Gigafactory.
He also points out that the battery costs for the Chevy Bolt are already lower than the costs for Tesla’s batteries. Further, the Bolt will be out just months from now, and he predicts that GM will have difficulties keeping up with demand for the all-electric car with more than 200 miles of range.
Tesla might become GAAP profitable in Q3… Or not
Musk said recently that the automaker could become GAAP profitable in the third quarter, which is an interesting statement in light of all they have going on – the SolarCity merger, the Model 3 development and production, catching up on Model X production, and more. It would be the first time in three years Tesla has been GAAP profitable, but let’s not forget that the automaker has not been keeping up with the ultra-ambitious targets Musk has been setting — not like it once did.
The Tesla chief even went so far as to say they’ve moved up their target for churning out 500,000 cars two years earlier than previously scheduled, but he he doesn’t expect to meet that expectation. It’s worth questioning why anyone, especially a high-profile executive like Musk, would set a target they don’t think they can meet. Apparently it’s all about pressuring employees, but it seems like the pressure will be off now that the cat’s out of the bag.
Tesla will keep losing money
Pabrai doesn’t believe Musk can deliver on profitability any time soon. He predicts that Tesla will continue to lose billions of dollars for years, adding that these losses aren’t startup losses because the automaker is “a negative operating margin business.”
“This is why [Fiat Chrysler CEO] Sergio [Marchionne] scratches his head every time he looks at Tesla,” he added.
Stanphyl Capital expressed similar sentiments on the EV maker recently, referring to it as a cash incinerator rather than a business.
Fiat has been selling its own electric car, the 500E, for years, and Marchionne intends to clone the Model 3 if it is profitable at $35,000 within a year, Pabrai noted. He added that he would never bet against Marchionne, but it sounds like he would certainly bet against Musk.
“Elon Musk’s modus operandi is to over-promise on delivery dates and product price,” Pabrai wrote. “He usually blows them by years and tens of thousands of dollars. Tesla ain’t gonna have no $35,000 anything till at least 2020 – or maybe never.”
The fund manager adds that even if the automaker successfully delivers on Musk’s ambitions for the Model 3 and goes on to sell hundreds of thousands of cars profitably per year, it will be “a long time” before it threatens Fiat Chrysler.
“GM, Ford and FCA will all clone the Tesla lineup and capture share,” Pabrai summed up. “There is nothing Tesla has (other than the direct selling model) that the Big Three, Germans, Japanese and Koreans cannot clone.”
Tesla Motors shares slumped by as much as 2.26% to $197.14 during regular trading hours on Thursday.