Mark Spiegel’s Stanphyl Capital is having a killer year up close to 35% NET YTD – see below for an excerpt on Tesla Motors Inc (NASDAQ:TSLA) from their November shareholder letter. But first… although he is known as Elon Musk’s number one enemy, Mr. Spiegel makes most of his money from killer small cap picks. His under the radar small caps which could pop just based on this piece (if we discussed it publicly) were profiled in ValueWalk’s 2nd edition of our quarterly premium newsletter. See some details followed by the Stanphyl section on Tesla Motors.
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Stanphyl Capital Management LLC Stanphyl Capital GP, LLC Stanphyl Capital Partners LP
Friends and Fellow Investors:
For November 2016 the fund was up approximately 6.7% 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 11.2%. Year to date the fund is up approximately 34.7% net while the S&P 500 is up approximately 9.8% and the Russell 2000 is up approximately 18.0%. Since inception on June 1, 2011 the fund is up approximately 133.5% net while the S&P 500 is up approximately 84.0% and the Russell 2000 is up approximately 68.4%. (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.
And now for our individual stock positions…
We remain short shares of Tesla Motors Inc. (ticker: TSLA; November close: $189.40) as I continue to believe that it’s the market’s biggest single-company stock bubble. November was a good month for Tesla shorts– not just because the stock was down a bit but because shareholders approved the merger with the financial boat anchor known as SolarCity, complete with its nearly $2 billion a year in negative free
Regardless, this was a blatant bailout by Tesla shareholders of Musk’s 22 million otherwise soon-to-be worthless SolarCity shares, but as they voted to approve it and I’m glad they did, it’s a real kumbaya moment for all of us. Of course, the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3”; I thus urge you to read my new Seeking Alpha article as to why that will never happen, reinforced by a new Bloomberg article about how much money GM is losing on the Bolt despite having a battery cost equivalent to Tesla’s.
Meanwhile, following a leaked September memo from Musk urging employees to artificially inflate Q3 company results, in October Tesla did indeed manage to report a Q3 GAAP profit thanks primarily to the one-time sale of stockpiled California Zero Emission Vehicle (ZEV) credits, without which it would have booked a $117 million GAAP loss. Also helping to offset a loss were seemingly artificially low operating expenses (up just 7.4% vs. Q2 despite an 81% increase in revenue) and a substantial reduction in per-car warranty accrual despite the reliability issues detailed later in this letter. (Based on a back-of-the-envelope interpretation of the data in the 10-Q, I estimate the current warranty under-reserve to be nearly $2000 per car.) Tesla also proudly proclaimed itself “free cash flow positive,” a figure obtained only by massively increasing accounts payable (i.e., stiffing its vendors) and postponing approximately $500 million of capex from Q3 to Q4. Assuming Tesla spends the $1.1 billion in Q4 capex it projects and normalizes its accounts payable, I estimate that Q4 should be free cash flow negative to the tune of approximately $1.5 billion.
Although Musk proclaims otherwise, simple math thus implies that Tesla will soon need to do yet another massive capital raise to build the Gigafactory and get the Model 3 into production (not to mention to replenish the cash drain from the massive financial sinkhole created by buying SolarCity), even though 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. As Tesla entered Q4 with around $3 billion in cash and on the Q3 conference call Musk said capex will be “higher in 2017 than 2016 for sure” and 2016 capex is projected to be $1.8 billion (including the aforementioned $1.1 billion scheduled for Q4), I’m guessing the company will be completely “cash free” by sometime in June and will thus look to raise money at least a quarter ahead of that. But wait a second! After the May 2016 raise didn’t Musk say he’d never need to raise capital again? Well actually he first said that in February… February 2012.
Tesla’s Q3 GAAP loss (excluding the non-repeatable ZEV credit sales) was $4710 per car sold, and contrary to the hopes and wishes of Teslarians and Teslemmings, Tesla would STILL be losing money even if it weren’t in “growth mode.” Q3 R&D spend was $8634 per car while R&D spend for slow-growing Porsche (Musk’s “profitability hero”) is approximately $10,800 per car. And while Tesla’s depreciation & amortization (a proxy for the “non-growth” component of its capex) was $11,299 per car while slowgrowth Porsche capex runs around $6100 per car, even if we were to adjust Tesla’s levels of both these metrics to that of Porsche, Tesla still would have lost $1677/car (GAAP, ex-ZEV sales) even if it weren’t “investing for growth.” Thus, Tesla’s (ex-ZEV credit sale) GAAP loss occurred because it’s a lousy business not because it’s a fast growing one.
Meanwhile, despite this nonsensically deceptive Musk comment from the October 26th earnings call…
One of the other things I’ve seen out there is that, like, somehow we achieved these numbers as a result of widespread discounting, that is absolutely false. There were a few discounts that – but they were few and far between and that has been absolutely shot down to zero.
…Tesla discounting continues unabated. Here’s a screenshot from Tesla’s website, taken while Musk was saying that there’s no discounting:
And here’s a link to a great web site showing just some of the additionally discounted inventory cars Tesla has available, many of which offer discounts of thousands of dollars on top of the $1000 referenced above and are brand new (with just 50 delivery miles) and