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.

 

Unsplash / Pixabay

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:

electric car Tesla Inc TSLA Elon Musk

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 For Highway Safety the Model S fell short of a safety rating awarded to 42 other cars while analysis of data from the state of California showed that its autonomous driving system was statistically far behind most of the competition’s. Then the excellent investigative journalists at Daily Kanban proved that the videos Tesla put out promoting its new system were hugely deceptive, while you can watch this or this to see what a disaster Tesla’s latest “autopilot” truly is. Then take a look at the “Autonomous Driving” links a few pages below and tell me how anyone with a brain in his head could seriously think Tesla is ahead of the rest of the industry in safe autonomy? And as everyone will have Level 4 autonomy within 3-4 years, what exactly would, say, a one-year lead on a commodity be worth anyway, especially when its possessor is unable to profitably monetize it?

As for the political environment (very important for subsidy-queen Musk), Trump’s first budget makes massive cuts in EPA climate change programs, yet despite this 180-degree turn in government policy stock-pumping sell-side analysts and a complacent media recently promulgated the nonsensical assertion that Musk and Trump had developed some kind of “relationship” simply because Trump (undoubtedly as a favor to friend-in-common Peter Thiel) stuck Musk on a couple of “advisory committees.” Does anyone with a brain in his head think Trump isn’t well aware of these comments from Musk in November and isn’t one heck of a grudge-bearer? At one of those meetings you can watch Trump brush right by Musk while appily greeting pretty much everyone else in the room, and note that he explicitly didn’t invite Musk to a well-publicized meeting with the heads of all the other U.S. automakers, while Musk’s whine in March about Trump’s NASA plans undoubtedly only further damaged the relationship. The bottom line is that Trump wants to create American manufacturing jobs by cutting environmental regulation and slashing corporate taxes, and the first policy is diametrically opposed to the alleged “environmental mission” of Tesla (run by an “environmentalist” who flies around in a Gulfstream G650ER) while the tax cutting policy is great for real businesses with profits but of no help to a cash-burning Musk vanity project such as Tesla.

And what about the Gigafactory? Battery production is a mostly automated, modular process with few economies of scale beyond a size much smaller than “Giga”. Alpha published a terrific article about this specific to Tesla and soon Chinese producers will match or beat any price coming from the Gigafactory. fact, have a look at this amazing data showing where the real “gigafactories” are. Battery cells are indeed a commodity and watch out for a looming oversupply.

Meanwhile Tesla faces an onslaught of competition in all facets of its business. (Note: these links are updated monthly.) First, here are the competing cars…

The All-Electric 2017 Chevrolet Bolt EV

GM CEO: Chevrolet Bolt Is Our Platform For A Huge Range Of Vehicles Audi e-tron electric SUV arrives 2018 with 310-mile range

Audi e-tron to start @ €60,000 vs. $88,800 for base Tesla Model X Audi’s three-pronged EV assault: electric Audi roadmap revealed Mercedes Spotted Testing Four Electric Models For Launch in 2018-19 Daimler to invest $11 billion in electric vehicles

Daimler brings forward electric-car goal Jaguar Introduces 2018 All-Electric I-Pace SUV

Jaguar Land Rover says half of its new cars will have electric option by 2020 Porsche Mission E electric car to have wide range of variants

All New 200-mile Nissan Leaf Coming September 2017 200-Mile Hyundai IONIQ Electric Coming In 2018 Hyundai to Release 200-Mile Electric SUV in 2018

Volvo’s 2019 Electric Car to Have 250-mile Range and Cost $35,000-$40,000 VW’s new electric car will cost less, and go farther than, Tesla’s Model 3 VW hurries new EVs to meet CO2 targets

Volkswagen to build electric Microbus

VW’s EV platform ready for Skoda, Seat brands

Ford to launch fully electric SUV with range of at least 300 miles & two electrified police vehicles BMW launches second wave of electrification

Toyota, in about-face, may mass-produce long-range electric cars New Mazda electric car due in 2019

Electric Kia Stinger GT to rival Tesla Model 3

Infiniti to launch performance EV with Nissan tech by 2020 Nissan, Renault, Mitsubishi to share electric car platform Lucid Motors unveils its 400-mile range luxury EV

 

Lucid Air to Start At $52,000 After Tax Credit

Aston Martin Rapide To Ditch V12 In Favor Of Electric In 2018 Maserati executive confirms electric Alfieri

Peugeot and Citroen Promise 450 km (280 Miles) Electric Vehicle in 2019 New 2017 Renault ZOE ZE 40: 400 km Range*, 41 kWh Battery

Seat to launch first electric car in 2019

Mitsubishi To Launch New All-Electric and PHEV Compact SUV Between 2017-2020 Subaru to introduce all-electric crossover by 2021

Dyson car: former Aston Martin product development director joins Dyson 2017 Karma Revero (nee Fisker) launches with updates

Karma Owner Building 50,000 Cars/Year Electric Car Factory in China Borgward plans 10,000-unit electric SUV plant in Germany

Skoda electric SUV under development

NextEV plans Tesla Model X fighter for U.S. in late ’18 or early ’19

And in China…

Daimler strengthens dedication to emission-free mobility with new DENZA 400km EV for China Daimler to produce electric cars for EQ subbrand in China

Volkswagen To Launch 8 New Energy Vehicles In China Audi and FAW sign China electric car cooperation deal

Tesla Is Playing Catch-Up With China’s BYD in Nearly Every Business Category

SAIC to spend $2.2 billion on EVs, connectivity, aftersales services Tencent-Backed Company Aims to Launch Smart-Electric Cars Before 2020 Chery Breaks Ground on $240M EV Factory in China

Chery’s second EV plant to open in May in Dezhou

New Chinese Car Brand: WM Motors To Bring EVs To The Masses

Check Out These Five New Electric Cars From China, World’s Largest EV Market 10 New Electric Cars From China

LeEco Starts Building Its 20 Billion Yuan Car Factory In China

Future Mobility building $1.7B electric car factory in Nanjing for 300,000 cars a year

New Honda plant in China will “accommodate electrified vehicles”

Singulato is China’s latest e-car newcomer to rev up with big fundraising Quianu Motor aims to grab share of US electric vehicle market

NEVS receives approval for electric car factory with capacity of 200,000 units per year

Here are the competing car batteries…

LG Chem targets electric car battery sales of $6.3 billion in 2020 Samsung Presents Innovative Fast Charging Battery with 600km Range Samsung SDI to build $358 million car battery plant in Hungary by 2018 SK Innovation set to expand EV battery capacity

Daimler subsidiary ACCUMOTIVE begins construction of second Li-ion factory 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

China’s Contemporary Amperex building more battery capacity than Tesla Gigafactory

Contemporary Amperex building an EV battery/drivetrain facility in Europe BMW Shows Off Its Battery And Electric Motor Production Facility

FORD ACCELERATES ELECTRIFIED VEHICLE BATTERY RESEARCH AND DEVELOPMENT

Volkswagen will invest $3.7 billion in battery cell & electric drive plant

Jaguar holds talks with Ford and BMW over building a giant battery factory Toyota works to develop advanced electric-car battery

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

Former Tesla executives plan to build $4bn Nordic battery plant Rimac is going to mass produce batteries and electric motors for OEMs

Here are the competing storage batteries…

Panasonic

Samsung LG

GE

BYD

AES Mitsubishi NEC Hitachi ABB

Saft EnerSys GS Yuasa E.ON

SOLARWATT Daimler Schneider Electric sonnenBatterie Kokam

Sharp

Nissan – Eaton Tesvolt Kreisel Leclanche

Lockheed Martin Alevo

EOS Energy Storage

Energy Storage Systems Inc. UniEnergy Technologies electrIQ

Belectric

Sunverge Stem

Green Charge Networks Imergy Power Exergonix

Redflow Fluidic Energy Primus Power

Simpliphi Power redT Energy Storage Bluestorage

Adara Blue Planet

Clean Energy Storage Inc. Swell Energy

Tabuchi Electric Younicos Orison

Moixa Powin Energy Nidec Powervault ViZn Energy

(And by the time the lithium ion Gigafactory is completed, it will not only be an oversized white elephant but may be obsolete, as “ Argonne Settles On The Two Most Promising Successors To Lithium Ion Batteries and the guy who invented the lithium ion battery has now invented something better.)

Here’s the competition in autonomous driving…

Updated 2017 Mercedes-Benz S-Class – first ride with autonomous technology Nvidia and Mercedes-Benz to bring an AI car to market within a year

New 2017 Audi A8 lets its drivers take hands off the wheel

Audi and NVIDIA team up to bring fully automated driving accelerated with artificial intelligence NVIDIA Partners with Bosch for System Based on Next-Generation DRIVE PX Xavier Platform Volkswagen and Mobileye sign agreement to develop autonomous driving

BMW, Intel and Mobileye Partnership Will Have Autonomous Test Vehicles on the Roads in 2017 Intel to Acquire 15 Percent Ownership of HERE For Autonomous Vehicles

Intel’s $15 billion purchase of Mobileye shakes up driverless car sector Delphi & Mobileye to sell autonomous system to any car maker by 2019 Volvo plans to offer fully self-driving car to luxury buyers

Volvo, Uber to Jointly Develop Autonomous Sport-Utility Vehicles Autoliv and Volvo form ADAS joint venture

GM Expands Connected and Autonomous Vehicle Engineering to Approximately 1000 Positions GM and Lyft aim to make autonomous taxis available in early 2019

Ford expands fleet of self-driving test cars

Toyota Bets Big On Autonomous Tech, Swallows Millimeter Radar Maker Hyundai Presents Autonomous IONIQ Electric Prototype at 2017 CES Alphabet’s Waymo to supply autonomous hardware & software to any car maker Autonomous Nissan Leaf Video

Second Generation Automated Acura RLX Development Vehicle Revealed in California Chery, Baidu test fleet of 10 self-driving EVs

Lucid Chooses Mobileye as Partner for Autonomous Vehicle Technology Continental AG Working on Self-Driving Partnerships

Apple drops clues about self-driving car program, confirms work with Bosch BlackBerry to open autonomous vehicle hub

Mitsubishi Electric Develops Automated Mapping For Autonomous Driving Baidu Announces Strategic Autonomous Driving Partnership with BAIC Hitachi demonstrates vehicle with 11-function autonomous driving ECU DENSO and NEC Collaborate on Automated Driving and Manufacturing France rolls out ‘world’s first’ driverless buses

And here are the competing charging stations…

BMW, Daimler, Ford, VW, Audi & Porsche JV for 350kw Charging On Major Highways in Europe Chargepoint Europe Gets $82 million in new funding from Daimler

VW installing ultra-fast 320 kW chargers as part of its $2 billion U.S. EV infrastructure plan EVgo Installing First 350 kW Ultra Fast Public Charging Station In The US

ChargePoint Express Plus Debuts: Offers Industry High 400 kW DC Fast Charging BMW and Volkswagen Take on Tesla Motors With a New U.S. Fast-Charging Network BMW, Nissan fund EVgo fast-charging network expansion

5 European fast charging networks form Open Fast Charging Alliance Shell installing electric vehicle chargers at its gas stations

Total planning EV charging points at its French stations

Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???

Who You Gonna Believe? Elon Musk’s Words Or Your Own Lying Eyes?

How Tesla and Elon Musk Exaggeraged Safety Claims About Autopilot and Cars When Is Enough Enough With Elon Musk?

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

(And by the time the lithium ion Gigafactory is completed, it will not only be an oversized white elephant but may be obsolete, as “Argonne Settles On The Two Most Promising Successors To Lithium Ion Batteries” and the guy who invented the lithium ion battery has now invented something better.)
Here’s the competition in autonomous driving…

Tesla’s Financial Shenanigans Tesla: A Failure To Communicate 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

I’ve argued for a while that the “Tesla love/loyalty” one reads about on the forums (“Even though my Tesla is in the shop a lot I’ll never go back to a regular car!”) and in the Consumer Reports owner survey 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. Here’s a new study from McKinsey supporting this:

So when the Germans (Audi, Mercedes and Porsche) and Jaguar roll out their 300-mile luxury EVs in 2018/2019 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. (Tesla’s Model X has been a quality-plagued disaster, with Consumer Reports in November giving it an overall rating of 59 on a scale of 100—tied for worst among 16 competing vehicles in its class.)

In addition to its quality problems, the X’s multi-thousand-dollar premium to a comparable Model S sedan is a huge sales-limiting factor, as nearly all the luxury competition prices its premium SUVs considerably less expensively than its premium sedans. For instance, the most basic “X” with no options and a warm-weather range of just 237 miles (well under 200 miles in cold weather) starts at $85,500 with only five seats standard. By comparison, the Porsche Cayenne starts at $60,600, the Audi Q7 at $49,000, the BMW X5 at $55,500, the Volvo XC-90 at $45,750, the Jaguar F-Pace at just $41,990 and the seven seat Mercedes

GLS at $68,700, and all those vehicles average more than twice the range of the Tesla with far more flexible refueling capabilities for long trips. And as noted earlier, the upcoming pure electric “crossovers” from Jaguar, Audi and Mercedes are all expected to price at least $20,000 cheaper than the least expensive Model X.

Meanwhile, the heretofore revered Model S is now on the Consumer Reports “Used Cars to Avoid” list with “much worse than average reliability” (although the new models have improved to “average”). On the bright side though, Tesla owners get to make lots of new friends at their local service centers, assuming they don’t mind the month-long wait times for an appointment.

So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition, and things will only get worse once it does. Thus this cash-burning Musk vanity project is worth vastly less than its approximately $50 billion enterprise value and—thanks to that debt—may eventually be worth “zero.”

And now for the long positions…