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

 

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[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.)

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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 offer SpaceX investors my sympathy, except that many of them are dumb enough to also own Tesla. September was fundamentally yet another bad month for Tesla, as multiple car makers introduced electric vehicles at the Paris auto show while General Motors announced that its new Bolt EV (available this December), will have a surprisingly high EPA-rated range of 238 miles, handily topping the 210-miles of the cheapest Tesla Model S (which is $30,000 pricier) while matching its 94 cubic feet of interior passenger space and posting a zippy 0-60 time of approximately 6.5 seconds. Seeing as studies show that 15% of Tesla buyers come from a Prius and many others come from other inexpensive “eco-favorable” cars, I expect the Bolt to grab back a significant number of them—what I call the “stretch buyers” who paid up for a Tesla because they wanted an electric car with 200+ miles of range; those people can instead now choose the much less expensive/easier to park Bolt over the current Model S, probably at least two years before Tesla’s so-called “mass market” Model 3 can be in true mass production (late 2018 vs Tesla’s claim of 2017) at a base price (as discussed later in this letter) I estimate will be approximately $10,000 higher than the $37,000 Bolt. Of course, the Bolt is just the first of an onslaught of competition Tesla will soon confront in all facets of its business. First, here are the cars… Introducing the All-Electric 2017 Chevrolet Bolt EV All-Electric Audi Q6 e-tron Coming in 2018 with 300+ Miles of Range Audi A9 e-tron production confirmed Mercedes Generation EQ SUV at Paris motor show – production in 2019 Daimler confirms EQ subbrand – 10 new electric cars by 2025 Porsche Mission E Receives a Green Light Porsche Is Reportedly Planning a Smaller Version of the Mission E Sedan Porsche Cayenne Coupe: meet the hunkered-down, electric SUV Five All-Electric Volkswagens within Five Years BMW Set to Roll Out Electric Mini, X3 to Counter Mercedes Push Nissan confirms next-gen Leaf will have over 200-mile range Ford to spend $4.5 billion on 13 new electrified vehicles 2018 Jaguar E-Pace compact SUV will be Jaguar’s first EV Volvo sets goal to sell 1 million electrified cars by 2025 Hyundai steps up EV cadence Hyundai Motor plans luxury electric car under Genesis brand Honda Fuel Cell, Battery Electric and Plug-In Hybrid Variants to Leverage Common Platform Tesla Is Playing Catch-Up With China’s BYD in Nearly Every Business Category Aston Martin to develop first EV with China’s LeEco Bentley Mulsanne to swap its V8 for electric power Peugeot and Citroen Promise 450 km (280 Miles) Electric Vehicle in 2019 New 2017 Renault ZOE ZE 40: 400 km Range*, 41 kWh Battery 2017 Karma Revero (nee Fisker) launches with updates Karma Owner Building 50,000 Cars/Year Electric Car Factory in China Altieva Electric car startup fueled by Chinese money aims to catch Tesla German automaker Borgward launches PHEV in China, plans to sell EVs in Europe Mitsubishi To Launch New All-Electric and PHEV Compact SUV Between 2017-2020 Subaru to introduce all-electric crossover by 2021 Marchionne Mulls Maserati Electric Sportscar as Tesla Competitor Siemens and Valeo team up to produce electric car engines Faraday Future is building a fleet of prototypes, more vehicles spotted testing Faraday Future reportedly signed $2.4 billion supply contract with LG Chem for battery cells China’s LeEco to invest $1.8 billion in electric car factory How the Apple iCar could crack the automotive industry Meet NextEV, the Biggest EV Startup You’ve Never Heard Of Tencent-Backed Company Aims to Launch Smart-Electric Cars Before 2020 Dyson car: former Aston Martin product development director joins Dyson Samsung Thinking About Producing Electric Cars Taking on Tesla: China’s WM Motor sees mass market electric cars Daimler strengthens dedication to emission-free mobility with new DENZA 400km EV for China Chinese Air-Con Maker Gree Bets $2 Billion on Electric Cars (From that last link: “More than 200 Chinese companies… are developing 4,000 models of new- energy vehicles and unveiling prototypes.” Good luck in China, Tesla!) Here are the car batteries… LG Chem targets electric car battery sales of $6.3 billion in 2020 Samsung SDI to build $358 million car battery plant in Hungary by 2018 SK Innovation to supply EV batteries to Mercedes-Benz Panasonic to build (non-Tesla) green-car battery plant in China China’s BYD takes aim at Tesla in battery factory race Sony enters the EV battery business VW may pick China for first battery plant McLaren secures Formula E battery contract BMW Shows Of Its Battery And Electric Motor Production Facility How Bosch is developing the battery of the future FORD ACCELERATES ELECTRIFIED VEHICLE BATTERY RESEARCH AND DEVELOPMENT Jaguar holds talks with Ford and BMW over building a giant battery factory Kreisel Seeks to Overtake Tesla With Souped-Up Plug-In Cars Dyson Commits $1.4 Billion for Solid-State Battery Development Wanxiang is playing to win, even if it takes generations Here are the storage batteries… E.ON Signs Deal With Samsung SDI On Battery Energy Storage E.ON begins selling SOLARWATT electricity storage system in Germany E.ON wins ‘milestone’ UK battery storage deal “Convergent Energy + Storage” Awarded 35mw/140mwh California Energy Storage Project SOLARWATT announces expansion into UK solar storage market A Good Year for LG Chem’s Battery Storage Business Large-Scale Samsung-GE Battery Project Ready To Go Online In Imperial Valley China’s BYD takes aim at Tesla in battery factory race ‘World’s biggest’ battery test facility in Japan set to take lead in standardisation World’s Largest Storage Battery (from AES) Will Power Los Angeles AES to Deploy 37.5 MW of Advancion® Energy Storage Arrays for SDG&E AES and Mitsubishi to Sell Advancion® Energy Storage Solutions in Asia and Oceania AES Batteries Used in World’s Two Biggest Solar Storage Projects Stem to Provide Battery Storage for Con Edison in New York NEC Introduces Distributed Energy Storage Solution to Enable New Energy Services Daimler Establishes Mercedes-Benz Energy GmbH for Stationary Energy Storage Volkswagen eyes SMA Solar storage systems in cooperation talks Mavero Home Energy Storage Systems Offers Up To 9.6 kW Output For Charging Sonnenbatterie beats Tesla to the punch with US roll-out Avista and Schweitzer Engineering Develop Energy Storage Project In Washington Hitachi to Establish New Division in North America to Expand Its Energy Solutions Business Lockheed Martin Joins Energy Storage Fray With Lithium-Ion and Flow Batteries Saft to deliver megawatt-scale Li-ion system in largest storage project in Nordic countries SMA AND TESVOLT COLLABORATE IN THE BATTERY-STORAGE SYSTEM SECTOR Schneider Electric Promising Battery At Lower Cost Than Tesla Leclanché etablishes North American subsidiary to capitalize on US and Canadian BES market Duke Energy tests Aquion Energy battery and ultracapacitor system in North Carolina ABB Battery Energy Storage Systems South Korea set to deploy 36MW Kokam energy storage system Nissan and Eaton join forces to develop new commercial energy storage solution Nissan and Eaton make home energy storage reliable and affordable to everyone with ‘xStorage’ Sharp Launches New Solar-Energy Storage Financing Program ElectrIQ Offers 7.5 kWh Or Larger Home Energy Storage Solution Alevo to Deploy Largest Energy Storage System in Delaware French giant Engie Takes Control of Silicon Valley Battery Startup Green Charge Networks ZCell zinc bromide battery could challenge Australia’s soaring electricity prices Eos Energy Storage Awarded $2 Million to Demonstrate Battery Systems at UC San Diego ConEd Partnering With Sunverge for Nation’s Largest Residential Solar Storage Project BELECTRIC starts serial production for grid-connected EBU energy storage system Aquion Energy batteries part of big Illinois project A Battery Made From Metal and Air Is Electrifying the Developing World RedT Energy installing power storage system at 1MW wind farm on Scottish Isle of Gigha Rongke to Deploy Massive 800 MegaWatt-hour Vanadium Flow Battery in China Microsoft Partners With Primus Power Flow Batteries to Drive Energy Innovation at Datacenters SimpliPhi Power Unveils Battery Energy Storage Solution for Commercial Applications Sentinel Solar Announces Plug and Play Solar + Energy Storage Panasonic is quietly selling grid batteries in the U.S. Panasonic Enters Europe’s Burgeoning Home Battery Market Here are the autonomous vehicles… 2017 Audi A8 to feature first fully autonomous tech Mercedes-Benz announces plans to develop luxury driverless cars Volvo plans to offer fully self-driving car to luxury buyers Volvo, Uber to Jointly Develop Autonomous Sport-Utility Vehicles BMW to develop driverless car technology with Intel, Mobileye GM Expands Connected and Autonomous Vehicle Engineering to Approximately 1000 Positions GM and Lyft aim to make autonomous taxis available in early 2019 Ford Developing Fully Driverless Car Nissan debuts ProPILOT auto drive system Toyota Bets Big On Autonomous Tech, Swallows Millimeter Radar Maker Second Generation Automated Acura RLX Development Vehicle Revealed in California Bosch: We’ll Have Fully Autonomous, Connected Vehicles In Four Years Google Plans Self-Driving Car Development Center Near Detroit Google Self-Driving Car Project and FCA Announce First-of-its-kind Collaboration Hyundai says it’s discussing partnerships with Google Jaguar Land Rover to start UK tests of self-driving car technology Delphi, Mobileye Join Forces to Develop Self-Drive System Continental AG Working on Self-Driving Partnerships Apple hires Nvidia’s director of deep learning software, suggests work on autonomous vehicle Apple Hires BlackBerry Talent With Car Project Turning to Self-Driving Software Samsung says autonomous driving key to its car components push Panasonic to make push into autonomous tech Mitsubishi Electric Adapts Missile Guidance Systems for Self-Driving Cars Chip-Maker Nvidia Teams Up With Baidu to Develop an Artificially Intelligent, Self-Driving Car France rolls out ‘world’s first’ driverless buses Local Motors Debuts First Self-driving Vehicle to Tap the Power of IBM Watson Calif. startup aims to take autonomous cars to next level with new language On the road with George Hotz’s $1,000 self-driving car kit (In addition to the autopilot deaths mentioned earlier, at least five more autopilot-related crashes have occurred, totaling most of the Teslas although the passengers survived.) And here are the consortiums of charging stations… The Charging Interface Initiative With the ROEV Association, Electric Vehicle charging becomes more accessible Federal and Private Sector Actions to Accelerate Electric Vehicle Adoption in the United States Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really??? Musk Talked Merger With SolarCity CEO Before Tesla Stock Sale Debunking The Tesla Mythology Tesla Continues To Mislead Consumers Tesla Misses The Point With Fortune Autopilot Story Tesla Timeline Shows Musk’s Morality Is Highly Convenient Tesla Scares Customers With Worthless NDAs, The Daily Kanban Talks To Lawyers Tesla: Contrary To The Official Story, Elon Musk Is Selling To Keep Cash Tesla: O, What A Tangled Web We Weave When First We Practice To Deceive I Put 20 Refundable Deposits On The Tesla Model 3 Tesla’s Financial Shenanigans Tesla: A Failure To Communicate Tesla Is Stiffing Nevada On The GigaFactory Can You Really Trust Tesla? Elon Musk Appears To Have Misled Investors On Tesla’s Most Recent Conference Call Understanding Tesla’s Potemkin Swap Station Tesla’s Amazing Powerwall Reservations Heck, even the management team doesn’t believe in the management team! I’ve been arguing for a while that the “Tesla love” and “Tesla loyalty” that one reads about on the forums (“Even though my Tesla is in the shop a lot I’ll never go back to an ICE [Internal Combustion Engine] car!”) is really “EV loyalty/EV love”—in other words, many people like the instant torque and quietness of their EV drivetrains, not necessarily the fact that their frequently repaired cars happen to come from Tesla equipped with the interior “luxury level” of a 1990s Acura. Now some survey data from UBS seems to support this: tesla-motors-musk-ubs So when the Germans (Audi, Mercedes and Porsche) start rolling out their 300-mile luxury EVs in 18 months they’ll capture a lot of Tesla owners who love Tesla’s driving experience but not its reliability or interior, especially as fear grows that Tesla’s cash bleed means it may not be around to honor the eight- year drivetrain warranty that those “reliability issues” force it to provide. Meanwhile, in August Tesla 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. 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 down most 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.) [/drizzle]