Mark Spiegel’s Stanphyl Capital on its short Tesla Motors Inc (NASDAQ:TSLA) positions from its September letter to investors

But first see

Tesla Motors Inc (TSLA) Urging Employees To Inflate Numbers Ahead Of Secondary?
Source: Pixabay



[drizzle]For September 2016 the fund was down approximately 0.9% net of all fees and expenses. By way of comparison, the S&P 500 was unchanged while the Russell 2000 was up approximately 1.1%. Year to date the fund is up approximately 19.0% net while the S&P 500 is up approximately 7.8% and the Russell 2000 is up approximately 11.5%. Since inception on June 1, 2011 the fund is up approximately 106.3% net while the S&P 500 is up approximately 80.7% and the Russell 2000 is up approximately 59.1%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.)


Guess which CEO put out a late-August memo (leaked in September) urging his employees to artificially inflate Q3 company results for just long enough to do a successful stock offering? It’s the same CEO who earlier this year adamantly said “We don’t discount for anyone!” and yet is now doing exactly that on a massive scale. It’s the same CEO who failed to disclose a material product-related death shortly before a huge stock offering and now we learn may have failed to disclose another material product-related death “more than shortly” before that offering. It’s the same global warming proselytizing, environmental subsidy-queen CEO who recently got himself a brand new Gulfstream G650ER, the largest, highest-flying, most fuel-guzzling new private jet you can buy short of a full-sized airliner. Yes, of course… that CEO is Tesla’s Elon Musk! Needless to say, we remain short shares of Tesla Motors Inc. (ticker: TSLA; September close: $204.03) as I believe that it’s the market’s biggest single-company stock bubble. Let’s dig into that above-referenced memo a bit: isn’t it incredible that giant mutual fund firms such as Fidelity, T. Rowe Price and Baillie Gifford—collectively, stewards of trillions of dollars of peoples’ retirement and other savings– would continue to be the largest stockholders in a company whose CEO actually wrote to employees in an email:

The third quarter will be our last chance to show investors that Tesla can be at least slightly positive cash flow and profitable before the Model 3 reaches full production… We are on the razor’s edge of achieving a good Q3, but it requires building and delivering every car we possibly can, while simultaneously trimming any cost that isn’t critical, at least for the next 4.5 weeks [emphasis mine]Even more important, we will need to raise additional cash in Q4 to complete the Model 3 vehicle factory and the Gigafactory. The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not “Tesla Loses Money Again”, but rather “Tesla Defies All Expectations and Achieves Profitability”.
I’m not sure what’s more incredible here: the fact that the CEO of an extremely well known public company urged his employees to artificially juice the quarterly numbers (“for the next 4.5 weeks”) in order to get more suckers to buy his stock (remember, he has already raised “the money to build the Gigafactory and Model 3” multiple times!) or that he put that in writing and emailed it to (presumably) thousands of people. Next time you hear someone call Elon Musk “a genius,” ask that person what kind of “a genius” would do either of those things! Also in September, Musk Tweeted an extremely favorable claim (derived from sparsely explained methodology) about Tesla resale values from a little-known website called “Autolist”… tesla-motors-musk-tweet-1

while at the same time he was selling used Teslas at massively higher rates of depreciation.
Then later in September Musk Tweeted… tesla-motors-musk-tweet-2

…and yet here’s a direct quote from that lazily-written, intellectually vapid article: “Today Tesla sells 100% of its cars, with no discounts”…
while here’s the reality. After those discounting reports surfaced all over the internet, Musk tweeted that he had no knowledge of such discounts and wouldn’t allow them except on “floor models.” Well that’s nice, except that Tesla deliberately produces thousands of “floor models” (i.e., “inventory cars”) per year– far more than it needs purely to demonstrate how its cars look and drive. (How stupid does Musk think his shareholders are? Apparently, very!) I thus fully expect the company to deliver a record number of cars in Q3 (my guess: 22-24,000), accompanied by another huge GAAP loss (excluding the possible sale of ZEV credits), followed by a plunge in deliveries in Q4 and a 10,000-car miss of its full year guidance of 80-90,000 cars. Meanwhile, in a late-breaking story a terrific new investigative report indicates that the Tesla factory may not have anywhere near the production capacity Musk claims it does. We await Tesla’s response (if it has one—the author of the story claims it didn’t). Does any of this bother you mutual funds who are long this stock? Or maybe you think what’s going on behind the scenes at Tesla is more honest than what’s right in front of your faces (assuming you even bother to fact-check what’s in front of your faces) because, well, that’s the way it usually works with public companies– they put their worst “honesty face” forward, right? If you believe that, feel free to keep your clients’ money in this stock… just have a good explanation ready for your investment committees in case things go wrong, because all these Tweets, conference call transcripts, speeches, leaked memos, etc. are in the public record and you’ve thus had every chance to examine (and act on) them. As an aside, in September Musk gave a lecture regarding SpaceX and his plans to use it a vehicle to settle humans on Mars. Other than the fact that this is a massive distraction for a guy trying to run a cash- burning car company, the ridiculousness of that project is beyond the scope of this letter. However, I did think his response to a question about whether he’d be willing to be the first person on Mars was particularly hilarious. I’m paraphrasing, but one of his primary hesitations was a fear that if he perished on the voyage “the company might fall into the hands of investors who are only interested in profits.” Normally after hearing that I’d

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