Stanphyl Capital June letter on Tesla Motors Inc. (NASDAQ:TSLA) short
For June 2016 the fund was up approximately 1.4% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 0.3% while the Russell 2000 was up approximately 0.1%. Year to date the fund is up approximately 16.6% net while the S&P 500 is up approximately 3.8% and the Russell 2000 is up approximately 2.2%. Since inception on June 1, 2011 the fund is up approximately 102.1% net while the S&P 500 is up approximately 74.0% and the Russell 2000 is up approximately 45.9%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.)
In addition to our SPY short we remain short what I believe is the market’s biggest single-company stock bubble, Tesla Motors Inc. (ticker: TSLA; June close: $212.28),, which really jumped the shark in June when it announced (pending shareholder approval) a “bailout buyout” of Elon Musk’s other cash-burning,bankruptcy-bound company, Solar City (ticker: SCTY). Rather than laying out here the absurdity of this proposed transaction, I urge you to read through the fantastic articles about it on Seeking Alpha (not the ones written by the financial illiterates who own the stock, but the work of those who have actually done the math), or for a quicker take you can check the WSJ’s excellent “Heard on the Street” column. Even if the hype-hunting,intellectually lazy, Musk Kool-Aid drinking mutual funds that are long TSLA veto the deal, the credibility gap created by the self-serving obviousness of Musk’s proposal may finally pull those guys off the golf course (or at least delay their tee times) long enough to dump the stock.
Note: as I write this, there’s a late-breaking story about the NHTSA investigating Tesla’s autopilot for causing a fatal crash, something many thought was inevitable as Musk released to the public “beta” versions of a system to control 5000-pound cars at high speeds on public roads. There’s a good reason why every other manufacturer’s autopilot operates more conservatively than Tesla’s, and now one of its customers paid with his life for Musk’s recklessness. The stock is trading down significantly after hours on this news but this isn’t reflected in the fund’s June performance, which is marked to the 4PM close.
Also in June, in a desperate attempt to meet its delivery guidance no matter how much money it loses, Tesla introduced a 60kWh Model S that’s $8500 cheaper than the 75kWh version but comes with the same expensive 75kWh battery, partially deactivated via software. Seeing as Tesla Motors already averaged GAAP losses of over $19,000 per car in Q1, it’s going to be really exciting to see what this does to the P&L beginning in Q3. And of course in its Q1 earnings release the company made a completely absurd statement about producing alower-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 Musk’s own admission that the engineering design won’t even be finished until mid-July.
Of course none of this stopped Tesla Motors 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 (or Solar City) spend whatsoever. Thus, using the company’s own capex projections and even without the cash-burning Solar City acquisition, I estimate that Tesla Motors will be out of cash in approximately nine months, thereby necessitating yet another massive capital raise later this year. And
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.Meanwhile, Tesla will now buy some of its energy storage batteries from Samsung and Roadster replacement batteries from LG, so the hype story surrounding the cost advantages and proprietary nature of the Gigafactory (and its ten-figure 2014 financing, subsequently instead blown mostly on operating losses), may have been just that: moreTesla Motors 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 it’s currently only 14% of the size promised to the state of Nevada and Tesla’s shareholders and bondholders.
[drizzle]As for the potential profitability of the Model 3, in Q1 (as noted above) Tesla Motors 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 andUBS—the only large sell- side firm not conflicted by Tesla investment banking business—agrees. And while we’re at it, here’s yet another great article about the Model 3. As we’re short the stock, I actuallydo 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 Motors 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.
Back here in the real world, this fall General Motors begins 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 $30,000 less than the cheapest Tesla Model S while matching its range and 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 Motors 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 Nissan Leaf which is rumored to be out in late-2017.
Meanwhile Tesla’s rollout of its new Model X has been a disaster, with various enthusiast forums andConsumer 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 isnot a compliment. And in May Consumer Reports posted its first review of the X, and it was awful. 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, theAudi Q7 at $54,800, the BMW X5 at $54,700, the Volvo XC-90 at just $43,950, the Jaguar F-Pace at just $40,990 and the seven seat Mercedes GLS at $68,700, and all these vehicles average more than twicethe 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 the Consumer Reports “Used Cars to Avoid” list with “much worse than average reliability” and finished at the very bottom of TrueDelta’s most recent reliability list. (On the bright side, Tesla owners are getting to make lots of new friends at their local service centers, assuming they don’t mind the reported one-month waiting times for an appointment). You can now get four-week U.S. delivery on a custom Model S or instant gratification on myriad inventory models, neither of which says much for demand, and Tesla Motors has now embarked on yet another worldwide rebate program and 0% financing in China despite Musk’s explicit claim in the February conference call that “We do not discount our cars for anyone.”
It’s my belief that the “Tesla love” and “Tesla loyalty” that one reads about on the forums (“Even though my Tesla Motors is in the shop a lot I’ll never go back to an ICE [Internal Combustion Engine] car!”) isreally “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 theeight-year drivetrain warranty that those “reliability issues” force it to provide.
Meanwhile, the SEC has 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 may get a haircut of approximately 30%.
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