Tesla Motors (TSLA): The Short Case Is Far More Than Valuation

Tesla Motors (TSLA): The Short Case Is Far More Than Valuation

Tesla Motors stock continues to be the focus of much debate, and today we’ve heard about another hedge fund that’s shorting the EV manufacturer. Mark Spiegel of Stanphyl Capital explained in a recent letter to investors why he’s short Tesla. The letter was shared with ValueWalk and is embedded below in its entirety. The firm follows a long-short equity strategy. The hedge fund started investing in June 2011 and boasts a return of 76.2% since its inception, outperforming the S&P 500’s 70.3% gain over the same time frame.

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Shares of Tesla started climbing in early trades this morning and were up 2.21% at $235.35 per share and still rising as of this writing, possibly because of a positive report from Goldman Sachs.

Why short Tesla?

Spiegel said in his letter to investors that Stanphyl was down for November by about 2.5%, net of fees and expenses, underperforming the S&P 500's increase of about 0.3% during the month. He said their short of Tesla Motors was mostly to blame for that decline.

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You can read the full letter below, but to make a long story short, he is adamant that Tesla stock will decline based on numerous fundamental metrics. You'll see a smorgasbord of links in his letter which explain why he thinks the automaker doesn't actually have the proprietary technology much of the market thinks it has. Really it's quite impressive the number of links he has backing up his thesis in this area and several others.


He sees competition as a huge risk and accuses Tesla management of a long string of deceptions. He notes that most of the automaker's original C-level executives have left and that regulatory filings indicate a high level of insider selling of Tesla stock. He says the EV manufacturer is on track to run out of cash sometime next year despite recent fundraising efforts and expects yet another one in the near future. And finally, he thinks the Model X is overpriced, a theme we've heard multiple times before.

So check out Spiegel's full letter below. It's an excellent read.

In a seemingly shocking move, in November we got long Elon. No, not Elon MUSK—we’re still very short him. Instead we bought Echelon Corp. (Ticker: ELON; basis: $0.628; November close: $0.637). This is an “industrial internet of things” networking company (now primarily focused on “smart” commercial LED lighting) that has been in a long decline, with a slowly eroding fab-less chip business and a stock price down roughly 98% (!) from its 2007 peak. We bought this $40 million revenue, 56% gross margin company for almost nothing, as its roughly $25 million in net cash is only a couple of million dollars below its market cap. The catch of course is that it’s burning that cash-- currently at a rate of around $4 million a year-- but with extensive restructuring and extremely fast growth in its nascent LED networking business, it looks as if it’s on a path to being cash-flow break in perhaps two years. If it gets there on $48 million of revenue with $19 million of remaining cash, at a strategic acquisition price of 1.5x revenue plus a reasonable value for its nearly $240 million of NOLs it would be worth over $2/share. If it doesn’t get there but cuts the burn enough to be profitable for a strategic acquirer (say, down to $1 million a year but with an additional $4 million of potential cost eliminations), it should still be worth around $1/share, as I think there would be some buyer out there who would pay 0.5x-0.75x revenue plus the remaining cash plus something for the NOLs for a $40 million/year, high gross margin business. I know there are some big “ifs” behind these numbers but considering that the cash in the bank gives the company at least six years to get to break-even, I think it’s an interesting proposition. (The stock is reverse-splitting 1:10 in December, so if you happen to punch up a quote mid-month don’t get too excited—we will not have made a 1000% return in just 30 days!)

As noted above, we remain short Tesla Motors (ticker: TSLA; November close: $230.26) which in November reported yet another disastrous quarter (Q3), with a record-setting $595 million of negative free cash flow and-- based upon ongoing costs vs. the amount set-aside for newly sold cars-- what looks like a severely inadequate reserve for future warranty expense. (In October Consumer Reports finally acknowledged Tesla’s widely known reliability problems, and it isn’t just Consumer Reports that noticed.) The big picture issues for Tesla are twofold (note: many of these links are newly updated): 1) The market is under the mistaken impression that it has significant & sustainable proprietary technology when it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in batteries (where even its sole supplier Panasonic is going into direct competition with it both at utility scale and in the home); it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t , doesn’t and doesn’t in cars (in fact even Mercedes is ending its Tesla relationship and will build its own direct competitor) and LG can now offer a complete turnkey electric drivetrain to any manufacturer who wants one; it doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in autonomous driving (for example the new Mercedes E- Class—out this spring— has 23 sensors for autonomous driving vs. just 14 for Tesla and the CEO of Mobileye—Tesla’s autonomous driving technology supplier— recently said the hardware on the current Model S is inadequate for true autonomy while even the new $30,000 50+ mpg Prius has auto-pilot and self-parking); and it doesn’t and doesn’t in charging (Tesla has spent only around $175 million on its much-touted Supercharger network, a rounding error for the upcoming charging consortiums of big auto makers), and 2) The company’s management tells deception after deception after deception after deception after deception after deception after deception. Meanwhile, Tesla cars are now selling so well that the company is paying referral incentives and recently created a new low-margin “stripper” model.

In June Tesla’s CFO "retired" at age 52 and dumped nearly all his stock (they finally found a successor for him in November) while the VP of Sales & Service was also just replaced (with the previous one dumping his stock on the way out) and the (so far not leaving) VP of Manufacturing has sold almost everything.

Even the Chief Technology Officer-- the only remaining original C-level exec (besides Musk)-- is steadily dumping, as is Musk’s own brother, Fredo (sorry, I mean Kimbal). And despite encumbering nearly all its assets with a senior credit line and then doing an August follow-on stock offering, Tesla is on schedule to be out of cash by some time in 2016, thus making yet another near-term major capital raise inevitable.

Meanwhile, in November Tesla finally revealed the pricing for its long-delayed Model X crossover/SUV, and its $5000-$7000 premium to a comparable Model S sedan will be a huge sales-limiting factor, as nearly all of the luxury competition prices its premium SUVs considerably lower than its premium sedans. (The most basic “X” with no options and only 220 miles of range starts at $81,000 with only five seats standard; by comparison, a seven-seat Mercedes GL starts at $67,000.) TSLA is worth vastly less than its current roughly $36 billion fully diluted enterprise value and—thanks to over $3 billion of debt plus its credit line—may eventually be worth “zero.” Meanwhile, here’s one chart that tells you all you need to know about this taxpayer-subsidized, Musk vanity project of a company:


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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
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  1. I bought 100 share of TSLA back in March 2013 at $38.50/share and still have those 100 shares.

    I also started reading articles on SeekingAlpha and probably have read every single word Mark Spiegel has written.

    He is a sane man that has gotten burned big time. Anger is deep and simmering. He needs help.

    Investing should be a cold endeavor. 1) Is there demand for the product at the price? 2) Is the product a high quality? 3) Can the company produce enough of the product at a good price to be profitable?

    As far as Tesla Motors, it has all of those.

    1) 70% of all consumers think about the environment when purchasing any product.
    Gasoline taxes are 50cent gallon, the equivalent cost of a comparable 20mpg full size vehicle.

    2) Consumer Reports had the vehicle on the recommend list, then took it off. But the F150 sells 750k units a year vs the Toyota Tundra that sells 118k. Ford has crappy CR ratings and Toyota Tundra has excellent ratings.

    3)That is the million dollar question. I am betting all my money that will happen. I expect my under $4k investment to be worth 7 figures in 15 years.

  2. Mark Spiegel, as mentioned by Oil4AsphaltOnly, is not credible. His “Hedge Fund” is run out of an apartment in New York and he spends all of his days insulting Tesla and Elon Musk on Seeking Alpha and Twitter. I find it hard to believe that his “hedge fund” has any clients to write letters to, but I don’t know many who would be happy to have their money with someone with such a poor record who decides to embarrass himself in public every day. Valuewalk and this article are not credible also, by association.

    So, should you listen to a deranged troll with a fake hedge fund who has been short TSLA since $35, OR should you listen to Goldman Sachs?

  3. It’s true Tesla valuation is absurd and competition is fierce. On top of that, there is much risk that the company turns into a flop. Now, when you drive a Tesla, visit their stores, and see Musk’s track record, qualitative factors show that it makes sense to invest in them. I’m long and acknoledging the risk, I think the reward might pay off.

  4. Mark Spiegel is the one deceiving his investors. He’s been short TSLA since it was $35/share, and had only added to that position. he’s currently dollar-cost averaged to $200/share, but his short position had gone from miniscule to over 5% of his entire portfolio. If he had to cover his short position, his gains would effectively be wiped out. He went from a thesis of TSLA having a limited market, to vaporware model X, to TSLA being drowned by the resale-value-guarantee, to the current thesis of TSLA burning through cash (completely ignoring all the money that was spent on growth related capex). Shorting TSLA was the worst mistake he’d ever made. Unfortunately, instead of owning up to it, he continues to double, triple, even quadruple down – putting his investor’s money at risk with model X delivers only beginning and model 3 being unveiled in 4 months.

  5. A lot of research went into this. Thanks Michelle. My only quibble is that you could have modified all of those ‘doesn’t’ links into a list so we could better follow along with each point and which company or product it’s directed towards.

  6. I can’t begin to address all the “doesn’t(s)” and “deception(s)” here…I will simply say that constructing an argument and being correct on balance are two different things. This reads like a last-minute term paper.

  7. This is only one small quibble, but when you add the $10k or more you’ll spend filling up a Mercedes GL over 5 years, let alone the $7500 federal tax credit, the X becomes quite competitive in price. If they’re even close enough to get a prospective buyer to test drive both, I find it hard to imagine many people choosing the Mercedes, unless they are really concerned about exceeding the daily 220mi range of the X.

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