Stanphyl Capital discusses their short position in Tesla Motors Inc (NASDAQ:TSLA), in their letter for the month of August 2016.
For August 2016 the fund was up approximately 6.8% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 0.1% while the Russell 2000 was up approximately 1.8%. Year to date the fund is up approximately 20.2% net while the S&P 500 is up approximately 10.2% and the Russell 2000 is up approximately 8.3%. Since inception on June 1, 2011 the fund is up approximately 108.4% net while the S&P 500 is up approximately 80.7% and the Russell 2000 is up approximately 57.4%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.)
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; August close: $212.01), which in August reported yet another disastrous quarter, managing to lose (GAAP) $20,357 per car sold with negative sequential sales comps. Now, many bulls claim that Tesla loses so much money because it’s “investing for the future,” so let’s dispense with that claptrap right now…
First, even mature auto companies spend around 5% of revenue on capex. If we thus remove from Tesla’s Q2 GAAP loss the depreciation & amortization (as a proxy for capex) in excess of that, it still lost $12,044 per car. But what about R&D spend, which Tesla expenses while selling a relatively small number of cars?
Well in 2015, Porsche (Elon Musk’s “profitability hero”) spent approximately $10,800 in R&D per car sold, whereas in Q2 Tesla spent approximately $13,300, a difference of $2500 per car. So if we adjust Tesla’s capex as a percentage of revenue down to the industry average and adjust its R&D spend down to the level of Musk-hero Porsche’s, Tesla still lost $9544 per car in Q2 on a GAAP basis, and that was with its cheapest model starting at $70,000; i.e. good luck with a $35,000 Model 3! In other words, Tesla isn’t “a business”; it’s a cash incinerator.
Also in the Q2 earnings press release Tesla completely omitted any mention of its much-hyped battery backup business (and for good reason, according to the WSJ), and on the earnings call outright refused to update its equally hyped Model 3 reservation number (which of course in Tesla-speak means the number has gone either nowhere or down) and—in both the release and the conference call—failed to mention a surprise $411 million cash outlay to its convertible debt holders.
Meanwhile, Tesla clearly now faces slack demand for both its Model S and Model X, as it recently introduced a discounted leasing program and 60kWh versions of both cars. These new models are $8500 to $9000 cheaper than the 75kWh versions but come with the same expensive 75kWh battery, partially deactivated via software. Seeing as Tesla was already averaging massive per car losses, it will be really exciting to see what this does to the income statement beginning in Q3. At the same time, the company apparently has so much excess inventory (yes, Tesla does have “a production problem”—one of over-production) that it’s encouraging on-line buyers to take cars that are already built and heavily discounting brand new inventory (many cars with just 50 miles). And even for custom-ordered cars 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”?)
In June Tesla announced a “bailout buyout” of SolarCity, Elon Musk’s other cash-burning, bankruptcy-bound company, which in August posted a horrendous earnings report, showing annualized negative free cash flow (operating cash flow + capex) of approximately -$2.5 billion, meaning– as someone posted on Twitter– that the TSLA-SCTY deal is the equivalent of rats jumping from the iceberg to the Titanic upon impact. Of course, once the merger is completed and Musk has (at the expense of Tesla shareholders) preserved the value of his otherwise worthless $500 million in SolarCity stock, he may just shut downmost of SolarCity, letting it gradually disappear into the much larger sinkhole known as Tesla. (At least that’s what I’d do if I were a self-dealing CEO like Elon Musk.)
Meanwhile, in July Tesla admitted that despite knowing about a deadly crash in May caused by the failure of its much-hyped “autopilot,” it went ahead with a massive stock sale weeks later without making the incident public, thereby triggering an SEC investigation (and the SEC was already investigating Tesla for potential accounting violations prior to this, something Tesla—of course—never reported), while the NHTSA opened an autopilot investigation. Two more autopilot-related crashes occurred in July and then two more in August, totaling three of the four cars involved but, fortunately, leaving the passengers alive. (For three of those crashes the autopilot was on at the time of impact while for the fourth it supposedly shut itself off a few seconds before impact, thereby handing control back to the unprepared driver.)
Also in 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 mor
In late July Tesla hosted a completely phony “grand opening” for its so-called Gigafactory (to which Panasonic’s commitment is much less than is commonly believed) despite the fact that it’s currently only 14% of the size promised to the state of Nevada and Tesla’s shareholders & bondholders and not even close to producing anything meaningful 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-related financial projections, including a 25% (Tesla-defined & misleading) gross margin on a car costing half the 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 (not to mention the $411 million owed to the redeeming convert holders and the cash drain from the massive financial sinkhole known as “Solar City”), despite the fact that it raised nearly $2 billion in 2014 explicitly to build the factory and $1.7 billion in May 2016 explicitly to put the Model 3 into production. (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.)
But wait a second: after that May raise didn’t Musk say he’d never need to raise money again? Well actually, he first said that in February… February 2012.
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.
As for the potential profitability of the Model 3, in Q2 (as noted above) Tesla had a huge GAAP loss on every Model S/X 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. As we’re short the stock I actually do hope the car stickers at $35,000, as the more Tesla sells the more money it will lose, but in reality it will probably only be willing to sell Model 3s at a base price of just under $50,000, thereby substantially limiting its appeal. 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 multi-billion dollar 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 topping its 210-mile range and matching its 94 cubic feet of interior passenger space. 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 or 200-mile 2017 Honda Clarity. So I believe that once the Bolt is out to great reviews like this preliminary one in Car & Driver, 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 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 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 $55,500, 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).
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!”) 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, Mercedes and Porsche) start rolling out their 300-mile luxury EVs in 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 the eight-year drivetrain warranty that those “reliability issues” force it to provide.
So the big picture issues for Tesla are twofold: first, the market is under the mistaken impression that it has significant & sustainable proprietary technology. But it doesn’t in cars…
Volkswagen Group to produce more than 30 new EVs by 2025 All-Electric Audi Q6 e-tron Coming in 2018 with 300+ Miles of Range Audi A9 e-tron production confirmed
Mercedes planning electric-car subbrand to challenge BMW, Tesla Porsche Mission E Receives a Green Light
Porsche Cayenne Coupe: meet the hunkered-down, electric SUV Introducing the All-Electric 2017 Chevrolet Bolt EV
New 2018 BMW 3 Series to feature all-electric version to rival Tesla BMW Doubles Down on EVs
Nissan confirms next-gen Leaf will have over 200-mile range Ford to spend $4.5 billion on 13 new electrified vehicles Jaguar bets on luxury EVs
Aston Martin to develop first EV with China’s LeEco Bentley’s electric car plans revealed
German automaker Borgward launches PHEV in China, plans to sell EVs in Europe Mitsubishi To Launch New All-Electric and PHEV Compact SUV Between 2017-2020 Subaru to introduce all-electric crossover by 2021
Tencent-Backed Company Aims to Launch Smart-Electric Cars Before 2020 Samsung Thinking About Producing Electric Cars
(From that last link: “More than 200 Chinese companies… are developing 4,000 models of new-energy vehicles and unveiling prototypes.” Good luck in China, Tesla!)
…it doesn’t in EV batteries…
FORD ACCELERATES ELECTRIFIED VEHICLE BATTERY RESEARCH AND DEVELOPMENT Jaguar holds talks with Ford and BMW over building a giant battery factory KREISEL ELECTRIC BUILDS FACTORY IN UPPER AUSTRIA
…it doesn’t in storage batteries…
Avista and Schweitzer Engineering Develop Energy Storage Project In Washington
aft to deliver megawatt-scale Li-ion system in largest storage project in Nordic countries SMA AND TESVOLT COLLABORATE IN THE BATTERY-STORAGE SYSTEM SECTOR Schneider Electric Promising Battery At Lower Cost Than Tesla
South Korea set to deploy 36MW Kokam energy storage system Nissan and Eaton join forces to develop new energy storage solution ElectrIQ Offers 7.5 kWh Or Larger Home Energy Storage Solution Alevo to Deploy Largest Energy Storage System in Delaware
Eos Energy Storage Awarded $2 Million to Demonstrate Battery Systems at UC San Diego ConEd Partnering With Sunverge for Nation’s Largest Residential Solar Storage Project BELECTRIC starts serial production for grid-connected EBU energy storage system Aquion Energy’s Batteries Bring Energy Independence and Resiliency to Sonoma Winery A Battery Made From Metal and Air Is Electrifying the Developing World
Microsoft Partners With Primus Power Flow Batteries to Drive Energy Innovation at Datacenters SimpliPhi Power Unveils Battery Energy Storage Solution for Commercial Applications Panasonic is quietly selling grid batteries in the U.S.
…it doesn’t in autonomous driving…
Volvo’s self-driving car has a big edge over the competition and is coming sooner than you think Volvo, Uber to Jointly Develop Autonomous Sport-Utility Vehicles
GM Expands Connected and Autonomous Vehicle Engineering to Approximately 1000 Positions GM and Lyft aim to make autonomous taxis available in early 2019
Ford Developing Fully Driverless Car Nissan debuts ProPILOT auto drive system
Bosch: We’ll Have Fully Autonomous, Connected Vehicles In Four Years
Google Self-Driving Car Project and FCA Announce First-of-its-kind Collaboration Hyundai says it’s discussing partnerships with Google
Local Motors Debuts First Self-driving Vehicle to Tap the Power of IBM Watson Calif. startup aims to take autonomous cars to next level with new language
…and it doesn’t in charging…
…and meanwhile, Tesla is run by a highly deceptive management team…
So in summary, this cash-burning Musk vanity project is worth vastly less than its current approximately $31.6 billion market cap and—thanks to its debt—may eventually be worth “zero.”