Stanphyl Capital Letter for the month ended May 31, 2016; discussing their Tesla Motors short position. For May 2016 the fund was up approximately 3.3% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 1.8% while the Russell 2000 was up approximately 2.3%. Year to date the fund is up approximately 14.2% net while the S&P 500 is up approximately 3.6% and the Russell 2000 is up approximately 2.3%. Since inception on June 1, 2011 the fund is up approximately 98.1% net while the S&P 500 is up approximately 73.6% and the Russell 2000 is up approximately 46.0%. (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.
In addition to SPY I added this month to our short position in what I believe to be the market’s biggest single-company stock bubble, Tesla Motors Inc. (ticker: TSLA; May close: $223.23) which in May reported yet another disastrous quarter (Q1 2016), summarized beautifully (and hilariously!) in Seeking Alpha as “ Tesla Manages to Lose $19,059 Per Car Sold.” In that same earnings release the company made a completely absurd statement about producing its lower-priced Model 3 at a 400,000 car/year annual run-rate just two years from now, a pipe dream dissected beautifully in Forbes and again on Seeking Alpha and further reinforced by the May 10-Q which revealed that the design is still unfinished.
Of course none of this stopped Tesla in May from selling stock to supposedly fund this fantasy, when in fact the $1.7 billion the deal raised will barely cover the next six quarters of operating losses before any additional capex spend whatsoever. Using Tesla’s own capex projections, I thus estimate that it will be out of cash in approximately ten months, thereby necessitating yet another massive capital raise later this year. Not so coincidentally (in my opinion), the morning of the offering the analyst for Goldman Sachs (co-leader on the deal) upgraded the stock, just one day after the SEC announced new rules expressly forbidding the type of non-GAAP revenue projections & proclamations that Tesla and its sell-side research analysts have been using for years, meaning that in the very near future Wall Street’s Tesla revenue estimates will get a haircut of approximately 30%. Of course this wasn’t mentioned in the offering’s prospectus—not that it may have mattered, as after all Goldman’s best muppets (sorry, I mean “customers”) probably don’t read such things anyway.
In that same stock offering Elon Musk personally dumped nearly $600 million worth of shares, supposedly only to pay the taxes on his option exercise but few things said by Musk can be taken at face value and apparently this wasn’t one of them. Also, here (courtesy of the offering prospectus) is another amusing example of Tesla’s long history of speaking (or in this case, writing) with forked tongue:
[drizzle]On March 31, 2016, we unveiled Model 3… and as of May 15, 2016, we held deposits from about 373,000 customers… We have obtained this level of reservations… with only a few social media posts leading up to the March 31st unveiling.
Does Tesla really think that major stories in nearly every significant news publication worldwide (both in print and on-line) constitute “just a few social media posts”? (As an aside, this actually shows a decline in Model 3 reservations since shortly after the car’s unveiling, a figure which I expect to further decline as time elapses and competition and the car’s price increase—more on that below.) And how about this gem from the May 5th Q1 Tesla conference call in which Musk avows his dedication to fixing the massive (and so far seemingly unfixed) Model X quality issues (more on those later in this letter):
I’m personally spending an enormous amount of time on the production line. My desk is at the end of the production line. I have a sleeping bag in a conference room adjacent to the production line, which I use quite frequently.
I’m not sure how Musk defines “quite frequently” as earlier that same week he was apparently stranded at 1AM outside a New York party for the Met Costume Institute (no sleeping bag in sight!) and later that week he was Tweeting from a Space-X rocket launch in Florida. Also, Tesla has apparently now embarked on yet another discount program despite Musk’s explicit claim in the February conference call that “We do not discount our cars for anyone.” In fact, sometimes it seems the only time Musk tells the unadorned truth is if it happens to be spewed out by the random bs generator encapsulated in his brain, much the way one monkey in one hundred million might occasionally type a few sonnets of Shakespeare.
As for the potential profitability of the Model 3, in Q1 (as noted above) Tesla averaged a $19,000+ GAAP loss on every Model S it sold despite a starting price of $70,000 and an average price that ran much higher. So how does anyone with a brain in his head think this company can make money selling Model 3s—even if they’re 20% smaller than the S—starting at $35,000? I sure didn’t when I first wrote about this over two years ago and more recent analysis reinforces that conclusion and UBS—the only large sell-side firm not conflicted by Tesla investment banking business— agrees. And here’s yet another great article about the Model 3. As we’re short the stock, I actually do hope the car stickers at $35,000 and gets a trillion “reservations,” as the more Tesla sells the more money it will lose. In reality though, the company will probably only be willing to sell Model 3s starting at around $45,000, with most in the $50-$60,000 range (thereby substantially limiting its appeal) larded up with “options” that will be standard on mid-level Hondas by the time the car is available. And now that you’ve seen the “driveable prototype,” keep in mind that Tesla did the exact same thing with the Model S a full 3.5 years before it was in mass production, and even if we were to credit Tesla with “additional experience” and shave a full year off that figure, it wouldn’t put the Model 3 in meaningful production before late 2018. But hey, while you’re waiting don’t forget to reserve your $49,000 Model S! Oh, and one other thing: if Tesla goes belly up before your Model 3 is delivered, your $1000 deposit will make you just another unsecured creditor; i.e., a generous donor into the pockets of the $3 billion of debt holders who will auction off whatever’s left of the company.
Meanwhile, it now appears that Tesla may be looking at alternate battery suppliers, so the entire hype story surrounding the Gigafactory (and its ten-figure 2014 financing, subsequently instead blown mostly on operating losses), may have been just that: more Tesla hype. But in case Tesla does in fact still intend to pour billions of (freshly raised) dollars into