Mark Spiegel’s Stanphyl Capital is famous for its questioning of Tesla but its biggest alpha comes from his picks in small caps – see below for an excerpt on Tesla Inc (TSLA) from their July 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. Below is an excerpt on Tesla stock.
Yes, we remain short shares of Tesla, Inc. (TSLA), this bubble-market’s largest individual bubble, as well as the operator of what may be the world’s least efficient car factory which—according to new insurance industry crash tests— produces cars with a lower safety rating than many of its peers yet crash 37% more often with overall losses that are 124% higher.
Of course the big July event for Tesla was the “official” debut of the (already widely seen) Model 3, which will come in a base version with 220 miles of range (fewer than the Bolt’s 238) for $35,000 (if it’s actually made widely available) and a larger battery version with 310 miles of range starting at $44,000. For both cars, a package of heated power seats and upgraded audio costs another $5000, as does driver assist/Autopilot. More expensive AWD and “performance” versions will supposedly be available sometime next year. The positive news (for Tesla) from the event was:
Musk’s claim that they’ve had over 500,000 reservations (vs. the 400,000 consensus); however, it’s unclear if this is net of cancellations (and speaking of “cancellations” check out THIS ultimate sleaze move) and regardless, this is a statistic from before the (high) option pricing and (late) availability was announced
- Favorable reviews of the car from those who drove it at low speed around the Tesla factory neighborhood before having to extensively use the sightline-offset touchpad to control or view every function of the car, even something as mundane as the windshield wiper speed
The negative news from the event was:
- The above-noted touchscreen to control or view everything for the car is both inconvenient and outright dangerous
- As evidenced by comments on blogs & forums, the touchscreen, high option prices and late (if ever) availability of a $35,000 model and/or expiration of the $7500 tax credit subsidy will scare off a huge number of those who made deposits
- Musk warned multiple times of “hellish” production delays. (And keep in mind that delays and cost overruns have historically always been worse than he claims/predicts.)
A recent report from UBS thinks a high-volume, well-optioned Model 3 with the base battery could break even at $41,000. Although I think UBS is optimistic, for the sake of argument I was willing to assume it was correct and in May wrote an article for Seeking Alpha incorporating that information to explain why despite (and partially because of) the Model 3, Tesla’s current $1 billion annualized operating loss is likely to worsen in 2018. Rather than repeating that explanation here, please do read the article.
Additionally, Model 3 sales (regardless of its profit margin) are likely to disappoint. As noted above, I expect mass reservation cancellations to occur even before the $7500 tax credit phase-out begins in mid-2018. Have a look at the Model 3’s spartan dashboard vs its direct EV competitor the Chevrolet Bolt or the new $30,000, 50+ mpg, 850+ mile range (!) 2018 Honda Accord hybrid…
Or how about a $33,450 (before discounts) BMW 3-series?
Heck, even THIS interior seems safer and more user friendly than that of a Tesla Model 3:
Also in July, Tesla released its Q2 2017 delivery number, confirming zero growth (actually, a decline) over four consecutive quarters and thus proving that the market for its luxury EVs (Models S&X) is clearly saturated even before the arrival of the $35,000 less expensive Model 3 (which I expect to extensively cannibalize far more profitable Model S sales) or next year’s competition from Jaguar, Audi and Mercedes:
Q3 2016 deliveries: 24,821
Q4 2016 deliveries: 22,252
Q1 2017 deliveries: 25,051
Q2 2017 deliveries: 22,100
In fact, Q2 2017 was headed for a much worse sales comp vs. the previous three quarters when in mid-quarter moves of desperation Tesla slashed the price of the Model S75 by $7500 to $69,500 and brought back free lifetime Supercharging for buyers with (easily found) “referral codes.” (Say hello to an instant 2% margin hit for that one!) Then in June Tesla desperately offered multi-thousand dollar discounts (sometimes more than $10,000) on brand new inventory cars (see last month’s letter for details.) In May Tesla reported a disastrous Q1 with an operating loss of $258 million and a net loss of $330 million, and I expect Q2 (to be reported on August 2nd) to be even worse.
Also in July we also learned that Tesla’s latest battery cell, the 21700 made by Panasonic and used in the Model 3 (that’s right, Teslarians: Tesla doesn’t make its own batteries!) is already matched by or inferior to upcoming cells from LG and Samsung (and yet due to long-term “take or pay” contracts imposed on it by Panasonic, Tesla may actually now be among the industry’s highest-cost battery buyers). And we also learned that Toyota now expects to have EVs using solid-state batteries on the road within five years, thereby instantly turning any and all Tesla “gigafactories” into obsolete white elephants.
Also in July we learned of the departures of the key guys (Peter Rive and Jack West) in charge of developing the “solar roof tiles” (a hopelessly overpriced product I dissected several months ago) that were used to justify the SolarCity bailout. (Regarding those tiles, apparently last October’s debut was a complete fake designed solely to push through approval for the SolarCity merger and there’s very little happening at the factory—a New York State taxpayer boondoggle-- where they’ll allegedly be mass-produced.)
Finally in July there was this, which I present without further comment:
You can add the above-mentioned July SolarCity executive departures to a long list of recent escapees, including (in June) yet another Tesla “Head of Autopilot” (the second in six months), as well as three key engineers on the team plus (a few months previously) the “Head of Autopilot Hardware.” And as noted in previous letters, the excellent investigative journalists at Daily Kanban proved that the videos Tesla put out promoting its new autonomous system were hugely deceptive, and in May we learned that the CPU in Tesla’s hardware suite may be