Stanphyl July letter to investors – short Tesla Motors Inc. (NASDAQ:TSLA)
For July 2016 the fund was down approximately 3.3% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 3.7% while the Russell 2000 was up approximately 6.0%. Year to date the fund is up approximately 12.5% net while the S&P 500 is up approximately 7.7% and the Russell 2000 is up approximately 8.3%. Since inception on June 1, 2011 the fund is up approximately 95.0% net while the S&P 500 is up approximately 80.5% and the Russell 2000 is up approximately 54.6%. (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 our SPY and BNDX shorts we remain short what I believe is the market’s biggest single- company stock bubble, Tesla Motors Inc. (ticker: TSLA; July close: $234.79), which really jumped the shark in June when it announced 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 (which Musk apparently believes will be approved), here’s a terrific summary from newconstructs.com.
Following the June SCTY announcement, July was a multi-faceted disaster for Tesla (except, unfortunately, for its stock price!), kicking off with a huge Q2 delivery miss with negative sequential and annual sales comps for its mainstay Model S. (The quarter’s record financial losses will be reported in August.) Roughly concurrent with this, Tesla admitted that it knew about an early May deadly crash caused by the failure of its much-hyped“autopilot” but went ahead with its massive stock sale weeks later without making the incident public. And then at least two more autopilot-related crashes occurred, totaling both cars involved
but fortunately leaving their passengers alive. (For one of those crashes the autopilot was on at the time of impact, while for the other it supposedly shut itself off a few seconds before impact, thereby handing control back to the unprepared driver.) As a result of these incidents, the SEC opened an investigation into the non-disclosure before the May stock sale (and reportedly was alreadyinvestigating Tesla for potential accounting violations prior to this, something Tesla—of course—neverreported) while the NHTSA opened an autopilot investigation with a highly detailed nine-page information demand letter and a U.S. Senate committee is also looking into the incidents.
Then in mid-July Musk published a much-hyped (in anticipation) single page vision of where he wants to take Tesla in the future. Unfortunately for him though, Tesla is far behind deep-pocketed competitors in nearly every facet of this vague and unfinanced “plan,” something easily discerned by conducting a simple Google search on each of his stock-pumping buzzwords. Here’s one example,here’s another and here’s a third. I could easily post twenty or thirty more.
In late July Tesla hosted a completely phony “grand opening” for its so-called Gigafactory, despite the fact that it’s currently only 14% of the size promised to the state of Nevada and Tesla’s shareholders & bondholders and, appropriately enough, even showed off a completely phony Model 3 there. And of course at said “grand opening’ Musk made sure to spew out several nonsensical Model 3-relatedfinancial projections, including a 25% (Tesla-defined & misleading) gross margin on a car costing halfthe price of its current cars on which the (Tesla-defined & misleading) gross margin is only around 20%. Also at said “grand opening,” Musk admitted that Tesla will soon need to do yet another capital raise to finish the factory and get the Model 3 into production, despite the fact that it raised nearly $2 billion in 2014 explicitly to build the factory and $1.7 billion just nine weeks ago explicitly to put the Model 3 into production; in fact, that $1.7 billion will barely cover six quarters of operating losses before any additional capex (or Solar City) spend whatsoever. (On top of that $1.7 billion offering 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 much of the hype story surrounding the cost advantages and proprietary nature of the Gigafactory is 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.
Meanwhile, Tesla is clearly having serious demand issues for both its Model S and Model X. In June–recognizing the huge looming second quarter delivery miss and desperate to meet 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; it then did the same thing in July for the Model X. Seeing as Tesla already averaged GAAP losses of over $19,000 per car in Q1 (and they’ll almost certainly be higher for Q2), it’s going to bereally exciting to see what this does to the income statement beginning in Q3.
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 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 meaningfulproduction 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.
Back 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, an EPA range rumored to be at least 220 miles and a 0-60 time of under 7 seconds for $30,000 less than the cheapest Tesla Model S while significantly topping its 210-mile range and 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 at least 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. So I believe that once the Bolt is out to great reviews, there will be a massive number of Model 3 reservation cancellations– of course, Tesla will never tell us about them.
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 is not 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 $3000 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 200 miles (well under 200 miles in cold weather) starts at $75,200 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 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 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 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 multi-month waiting times for an appointment). Meanwhile, Tesla has now embarked on yet another worldwide discount program despite Musk’s explicit claim in the February conference call that “We do not discount our cars for anyone.” (Question for Tesla longs: how many times does a CEO have to lie to you before you realize he’s “a liar”?)
It’s my belief 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!”) 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) begin rolling out their 300-mile luxury EVs just a bit over 18 months 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.
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, doesn’t, doesn’t, doesn’t, doesn’t anddoesn’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, 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, 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 in 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, doesn’t, doesn’t,doesn’t and doesn’t in autonomous driving; and it doesn’t, 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 afterdeception after deception after deception after deception after deception after deception after deceptionafter deception after deception after deception after deception after deception after deception afterdeception while top executives continue to leave like rats abandoning a sinking ship.
So in summary, this cash-burning Musk vanity project is worth vastly less than its current approximately $35 billion fully diluted market cap and—thanks to its debt—may eventually be worth “zero.”