Mark Spiegel’s Stanphyl Capital had a killer year up close to 31% NET YTD – see below for an excerpt on Tesla Inc (NASDAQ:TSLA) from their March 2017 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.
We also remain short shares of this bubble-market’s largest individual bubble, Tesla, Inc. (TSLA), which in March raised (through a combination of stock and convertible debt) vastly less money than it needs to get through 2017 (unless it’s lying—again!—about projected capex). As of 12/31/16 Tesla had $430 million of net working capital and said it planned to spend $2-$2.5 billion in capex before the supposed September production of the Model 3, while operating losses have been averaging at least $150 million per quarter. Simple math thus tells us that Tesla will consume approximately $2.5 to $3.0 billion by the end of September, and yet its March raise netting approximately $1.2 billion (in convertible debt plus some equity) plus its $430 million of 12/31 working capital leaves it shy by around a billion dollars before the inevitable additional operating losses and capex in Q4 and well into 2018 (actually, well into infinity, with “infinity” defined as “between now and Chapter 11”). Meanwhile, Tesla now has approximately $7 billion in debt not including its massive “take or pay” battery obligations to Panasonic.
As an example of the fine “progress” Tesla has made over the past three years in the eyes of debt investors
(a far more analytical crew than the no-homework, bubble-market stock jockeys who own its equity), let’s have a quick look at the terms of the 2014 converts vs. the new ones; note both the significantly higher interest rate and significantly lower conversion premium demanded today vs. three years ago. Here are the terms from March 2014:
And here are the terms from March 2017:
Despite Tesla’s disastrous financials, its stock got a bit of a pop when it was revealed (via a 13-G filing) that publicly traded Chinese holding company Tencent had taken a 5% stake in it. Although part of this purchase was as a participant in the $350 million equity portion of the March financing, the average overall price of Tencent’s position is in the $217s (vs. the $262 price of the offering), meaning that nearly all its shares were bought in the secondary market with little of the investment going to Tesla. Also interesting is that Tencent bought exactly 5.0% of Tesla—just enough to file the 13-G as a sort of “press release” to boost the price of TSLA and thus its own stock. Tencent is almost certainly now finished buying TSLA because if it wanted more it would have done so before filing the 13-G that it knew would make any future purchases more expensive. And here’s the punchline: Tencent borrowed the money it used to buy the stock! So just as the Japanese top-ticked U.S. asset prices in 1989, perhaps now it’s time for the Chinese to do so.
Of course the new, more onerous terms of Tesla’s March convertible debt issuance occurred partially because in February it reported an awful 2016 Q4, with over a billion dollars of negative free cash flow and capex spend that was almost $600 million less than it claimed it would be in its 10-Q published in November of that same quarter. (Was this a blatant lie or just gross incompetence?) Also of note is that combined sales of the Models S&X have sequentially stopped growing, with Q4 deliveries thousands fewer than Q3’s and Tesla guiding to similar results going forward. (And this flatlining in growth is occurring before the arrival of superior and less expensive luxury electric competition from Jaguar & Audi in 2018 and Mercedes & Porsche in 2019.) Of course, the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3” and yet the Q4 results (a 23% gross margin on cars selling for an average price of $104,000) reinforce my Seeking Alpha article’s claim that can only happen at a massive per-car loss, and besides, good luck selling and servicing those cars. Meanwhile, Musk claims the Model 3 will be in true mass production later this year and yet the company is just starting to build some testing prototypes; thus, the only Model 3 “buyers” this year will likely be test pilots (either voluntary or involuntary), and here’s a terrific article pointing out what a logistical and financial disaster that will be. But hey, how about “Tesla Energy”? Sorry, but the Q4 battery storage gross margin was massively negative, as overall gross margin for “Energy Generation & Storage” was just 2.7% and that included a LOT of 30% gross margin SolarCity revenue. And in January the Tesla Energy sales director left and in December the “VP of Products & Programs” was gone, so I’m sure things there are going GREAT! And oh, I almost forgot: at the beginning of the Q4 conference call it was announced that Tesla’s CFO quit (on one day’s notice) is being replaced by the (more flexible?) original CFO. Always a good sign!
Also in February, in new crash tests by the Insurance Institute