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.
Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”
"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More
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:
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 that white (or perhaps I should say “red,” as in “red ink”) elephant, here’s an excellent dissertation on how stupid that would be. Of course, none of this is stopping the company from hosting a July “grand opening” for the facility, despite the fact that as of now it’s less than 20% of the size promised to the state of Nevada and Tesla’s shareholders and bondholders. But then, perhaps Musk is a really big “Spinal Tap” fan.
Of course here in the real world, late this year General Motors will begin delivering its new Bolt EV which really will cost $37,500 (before the $7500 Federal tax credit) and offers true five-passenger seating, a range of over 200 miles and a 0-60 time of under 7 seconds for HALF the price of the cheapest Tesla Model S while matching its 94 cubic feet of interior passenger space (albeit with less storage). Seeing as studies show that 15% of Tesla buyers come from a Prius and many others come from other inexpensive “eco-favorable” cars, I expect the Bolt to grab back a significant number of them—what I call the “stretch buyers” who paid up for a Tesla because they wanted an electric car with 200-miles of range; those people can instead now choose the much less expensive/easier to park Bolt probably two years before “the comparably priced Model 3 that won’t really be comparably priced.” And then of course plenty of potential Model 3 buyers—realizing they won’t get a car until 2019 or later—are likely to pick up a Bolt instead, or perhaps the 200-mile Leaf which is rumored to be out in mid-2017.
Meanwhile Tesla’s rollout of its new Model X has been a disaster, with various enthusiast forums and Consumer Reports reporting myriad problems with its “falcon-wing” doors, seats and general build quality; in fact in May the auto enthusiast web site Jalopnik hilariously entitled an article “ Tesla Model X Approaches Old Jaguar Levels of Build Quality,” and I assure those of you under the age of 35 that is not a compliment. And just today Consumer Reports posted its first review of the X, and let’s just say that if it were a Broadway show the cast of Tesla would spend tonight crying into its warm beer at Sardi’s (unless of course you think a line such as “Where were the responsible grownups when this machine was birthed?” constitutes some sort of counter-cultural rave). In addition to its design and quality problems, the X’s $6000 to $8000 premium to a comparable Model S sedan is a huge sales-limiting factor, as nearly all of 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 winter weather) starts at $84,200 with only five seats standard. By comparison, the Porsche Cayenne starts at just $59,600, the Audi Q7 at $54,800, the BMW X5 at $54,700, the new Volvo XC-90 at just $43,950, the new Jaguar F-Pace at just $40,990 and the new seven seat Mercedes GLS at $67,050, and all these vehicles average more than twice the range of the Tesla with far more flexible refueling capabilities for long trips.
As the Model X continues to flop around on the asphalt beach like a dying, falcon-winged whale, the heretofore revered Model S is now on Consumer Reports “Used Cars to Avoid” list with “much worse than average reliability.” In fact, you can now get four-week U.S. delivery on a custom S or instant gratification on myriad inventory models, neither of which says much for demand. I thus expect overall 2016 Tesla deliveries to be only around 65,000 vs. guidance of 80-90,000 (a huge miss) and now believe that the
“Tesla love” and “Tesla loyalty” that one reads about on the forums (“Even though my Tesla is in the shop a lot I’ll never go back to an ICE [Internal Combustion Engine] car!”) 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. So when the Germans (Audi, Porsche, Mercedes and possibly BMW) roll out their 300-mile luxury EVs in just two to three years 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. Meanwhile, Tesla owners are getting to make lots of new friends at their local service centers (for which there are reportedly one-month waiting times for an appointment), as guess who’s at the very bottom of TrueDelta’s car reliability list:
And those reliability issues coincide with what could be some potentially major Tesla safety issues, including at least two recent crashes involving a failure in some combination of its emergency braking system and much vaunted autopilot (here and here) as well as a potentially dangerous suspension corrosion issue seemingly covered up by Tesla via NDAs demanded of its customers. Stay tuned for potential further developments regarding those possible Tesla wheel collapses; meanwhile, here’s a collection of shocking photos.
The big picture issues for Tesla are twofold (note: these links are updated regularly): 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, 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 LG now offers a complete turnkey electric drivetrain to any manufacturer who wants one) and many of these EVs will be sold at or below cost (subsidized by the profits from their makers’ conventional cars), thereby creating intense pricing/margin pressure on Tesla; 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 and doesn’t in car batteries (where even its supplier Panasonic is going into direct competition with it via an unrelated factory); 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, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t, doesn’t and doesn’t in storage batteries (where its supplier Panasonic is going into direct competition with it both at utility scale and in the home) and the Tesla PowerWall has no business model anyway as partially proven in March when Tesla discontinued 50% of its hype-driven home product line; 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 and doesn’t in autonomous driving while even the new $20,000 Honda Civic offers nearly autonomous driving; and it doesn’t and doesn’t in charging (Tesla has spent only around $200 million on its much-touted Supercharger network, a rounding error for the inevitable 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 after deception after deception after deception after deception.
So in summary, this cash-burning Musk vanity project is worth vastly less than its current approximately $33 billion fully diluted market cap and—thanks to its debt—may eventually be worth “zero.”