Mark Spiegel’s Stanphyl Capital on its short Tesla Motors Inc (NASDAQ:TSLA) positions from its September letter to investors
For October 2016 the fund was up approximately 6.1% net of all fees and expenses. By way of comparison, the S&P 500 was down 1.8% while the Russell 2000 was down approximately 4.8%. Year to date the fund is up approximately 26.2% net while the S&P 500 is up approximately 5.9% and the Russell 2000 is up approximately 6.2%.
But first see
We remain short shares of Tesla Motors Inc. (ticker: TSLA; October close: $197.73) as I continue to believe that it’s the market’s biggest single-company stock bubble. Following a leaked memo from Tesla CEO Elon Musk (discussed extensively in last month’s letter) urging employees to artificially inflate Q3 company results, in October the company did indeed manage to report a Q3 GAAP profit thanks primarily to the one-time sale of stockpiled California Zero Emission Vehicle (ZEV) credits, without which Tesla would have booked a $117 million GAAP loss. Also helping to offset a loss were seemingly artificially low operating expenses (up just 7.4% vs. Q2 despite an 81% increase in revenue) and a (so far unspecified) reduction in warranty accruals despite the reliability issues detailed later in this letter, as well as what I suspect (but can’t prove) may be artificially high lease residual values. Tesla also proudly proclaimed itself “free cash flow positive,” a figure obtained only by massively increasing accounts payable (i.e., stiffing its vendors) and postponing approximately $500 million of capex from Q3 to Q4. Assuming Tesla spends the $1.1 billion in Q4 capex it projects and normalizes its accounts payable, I estimate that Q4 should be free cash flow negative to the tune of approximately $1.5 billion.
Although Musk proclaims otherwise, simple math thus implies that Tesla will soon need to do yet another massive capital raise (my guess is by the end of Q1) to build the Gigafactory and get the Model 3 into production (not to mention to plug the cash drain from the massive financial sinkhole created by buying SolarCity), even though 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. As Tesla entered Q4 with around $3 billion in cash and on the Q3 conference call Musk said capex will be “higher in 2017 than 2016 for sure” and 2016 capex is projected to be $1.8 billion (including the aforementioned $1.1 billion scheduled for Q4), I’m guessing the company will be completely “cash free” by sometime in July and will thus look to raise money at least a quarter or two ahead of that. But wait a second! After the May 2016 raise didn’t Musk say he’d never need to raise capital again? Well actually he first said that in February… February 2012.
Now let’s dig into those Q3 Tesla numbers a bit more…
Tesla’s Q3 GAAP loss (excluding the non-repeatable ZEV credit sales) was $4710 per car sold, and contrary to the hopes and wishes of Teslarians and Teslemmings, Tesla would STILL be losing money even if it weren’t in “growth mode.” Q3 R&D spend was $8634 per car while R&D spend for slow-growing Porsche
[drizzle](Musk’s “profitability hero”) is approximately $10,800 per car. And while Tesla’s depreciation &amortization (a proxy for the “non-growth” component of its capex) was $11,299 per car while slow- growth Porsche capex runs around $6100 per car, even if we were to adjust Tesla’s levels of both these metrics to that of Porsche, Tesla still would have lost $1677/car (GAAP, ex-ZEV sales) even if it weren’t
“investing for growth.” Thus, Tesla’s (ex-ZEV credit sale) GAAP loss occurred because it’s a lousy business not because it’s a fast growing one, and remember: that $4710 per car GAAP loss (excluding ZEV sales) was with Q3 revenue-per-car-sold of $86,620… Good luck making money with a Model 3 starting at $35,000!
As I know you’d be disappointed if I didn’t include at least one new nonsensically deceptive Musk quote in this letter, here’s a beautiful one from the October 26th earnings call:
One of the other things I’ve seen out there is that, like, somehow we achieved these numbers as a result of widespread discounting, that is absolutely false. There were a few discounts that – but they were few and far between and that has been absolutely shot down to zero.
Now here’s a screenshot from Tesla’s website, taken while Musk was talking:
And here’s a link to a great web site showing just some of the additionally discounted (above the $1000 referenced above) inventory cars Tesla has available, many of which are brand new (with just 50 delivery miles) and were built expressly for the purposes of being sold as discounted brand new inventory. I hope for the sake of his astronauts that Musk’s definition of “zero” is more accurate for his Mars mission calculations than it is when he speaks about moving aluminum off overstuffed car lots.
Also in October Musk held a press conference introducing a new hardware suite for Tesla cars that he claimed would eventually provide fully autonomous coast-to-coast driving. However, according to industry experts it’s unsafe to even attempt to do that without lidar (laser scanners) which the new hardware doesn’t include. Of course, this isn’t stopping Tesla from trying to charge $3000 up front for “potential future capability” or from showing a strategically cut (and hence potentially highly misleading) video of those alleged “capabilities.”
Finally in October (in an effort to encourage “yes” votes for the SolarCity acquisition) Musk held a press conference to introduce a line of glass rooftop solar tiles not scheduled to go into production until summer 2017 and about which no details whatsoever were released regarding price or efficiency. He also introduced a new Powerwall battery that offers approximately twice the storage of the old battery for the same price (and undoubtedly at little or no profit margin for Tesla), but despite that considerable improvement in the value quotient the unsubsidized economic case for the product is still nonexistent.
(But then, the unsubsidized economic case for ANY of Musk’s products is nonexistent!)
In September multiple car makers introduced electric vehicles at the Paris auto show while General Motors announced that its new Bolt EV (at dealers in November), will have a surprisingly high EPA-rated range of 238 miles, handily topping the 210-miles of the cheapest Tesla Model S (which is $30,000 pricier) while matching its 94 cubic feet of interior passenger space and posting a zippy 0-60 time of 6.5 seconds. 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 over the current Model S, probably at least two years before Tesla’s so-called “mass market” Model 3 can be in true mass production (late 2018 vs Tesla’s claim of 2017) at a base price (as discussed later in this letter) I estimate will have to be approximately $10,000 higher than the $37,000 Bolt. The first full reviews of the Bolt came out in late October and in a direct comparison test between the Bolt and the Tesla S 60 “Motor Trend” magazine concluded:
…if simple fuel-free driving is what you’re after, the Bolt’s stellar real-world range can cover a week’s worth of commuting plus errands for the average American without charging. Its 238 miles of range also easily enable intercity—but not interstate—travel. Toss the Bolt’s puppy-dog driving dynamics into the mix with its stellar efficiency and family-friendly packaging, and the choice becomes pretty clear: the Chevrolet Bolt EV wins.
And in another stellar review, “Car & Driver” wrote:
With the arrival of the 2017 Chevrolet Bolt EV, the electric car reaches a major milestone, one that also secures its future: a move toward mass appeal. It no longer matters if your in-laws show up at the airport unannounced. The Bolt has enough range to cover a day’s tasks plus the unexpected… Anyone with a typical new-car budget can afford a Bolt. And, in the bigger picture, it no longer matters if Tesla goes belly-up.
(That last line might indicate that even car reviewers pay more attention to Tesla’s financial statements than do its shareholders!)
Of course, the Bolt is just the first of an onslaught of competition Tesla will soon confront in all facets of its business. First, here are the competing cars…
Introducing the All-Electric 2017 Chevrolet Bolt EV
All-Electric Audi Q6 e-tron Coming in 2018 with 300+ Miles of Range Audi A9 e-tron production confirmed
Daimler confirms EQ subbrand – 10 new electric cars by 2025 Porsche Mission E Receives a Green Light
Porsche Is Reportedly Planning a Smaller Version of the Mission E Sedan Porsche Cayenne Coupe: meet the hunkered-down, electric SUV
Five All-Electric Volkswagens within Five Years
BMW to produce electrified versions of entire luxury lineup Nissan confirms next-gen Leaf will have over 200-mile range Ford to spend $4.5 billion on 13 new electrified vehicles 2018 Jaguar E-Pace compact SUV will be Jaguar’s first EV Volvo sets goal to sell 1 million electrified cars by 2025 Hyundai steps up EV cadence
Hyundai Motor plans luxury electric car under Genesis brand
Honda Fuel Cell, Battery Electric and Plug-In Hybrid Variants to Leverage Common Platform Tesla Is Playing Catch-Up With China’s BYD in Nearly Every Business Category
Aston Martin and LeEco Partner to Co-Develop Electric Vehicle Bentley Mulsanne to swap its V8 for electric power
Maserati EV Coming by 2019, Won’t Be a Tesla Clone
Peugeot and Citroen Promise 450 km (280 Miles) Electric Vehicle in 2019 New 2017 Renault ZOE ZE 40: 400 km Range*, 41 kWh Battery
Mitsubishi To Launch New All-Electric and PHEV Compact SUV Between 2017-2020 Subaru to introduce all-electric crossover by 2021
2017 Karma Revero (nee Fisker) launches with updates
Karma Owner Building 50,000 Cars/Year Electric Car Factory in China Tesla Owners, Will Lucid Make Your Next Electric Car?
Borgward plans 10,000-unit electric SUV plant in Germany Skoda electric SUV under development
Siemens and Valeo team up to produce electric car engines
Faraday Future is building a fleet of prototypes, more vehicles spotted testing
Faraday Future reportedly signed $2.4 billion supply contract with LG Chem for battery cells China’s LeEco to invest $1.8 billion in electric car factory
NextEV teases 1,000-horsepower electric supercar
Tencent-Backed Company Aims to Launch Smart-Electric Cars Before 2020 Dyson car: former Aston Martin product development director joins Dyson The Fisker EMotion Promises 400-Mile Range On Graphene Nanotech Samsung Thinking About Producing Electric Cars
Taking on Tesla: China’s WM Motor sees mass market electric cars
Daimler strengthens dedication to emission-free mobility with new DENZA 400km EV for China Chinese Air-Con Maker Gree Bets $2 Billion on 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!)
Here are the competing car batteries…
LG Chem targets electric car battery sales of $6.3 billion in 2020 Samsung SDI to build $358 million car battery plant in Hungary by 2018 SK Innovation to quadruple capacity of EV batteries
Daimler subsidiary ACCUMOTIVE begins construction of second Li-ion factory Panasonic to build (non-Tesla) green-car battery plant in China
China’s BYD takes aim at Tesla in battery factory race Sony enters the EV battery business
BMW Shows Off Its Battery And Electric Motor Production Facility
FORD ACCELERATES ELECTRIFIED VEHICLE BATTERY RESEARCH AND DEVELOPMENT Jaguar holds talks with Ford and BMW over building a giant battery factory Warming to lithium-ion, Toyota charges up its battery options
How Bosch is developing the battery of the future
Kreisel Seeks to Overtake Tesla With Souped-Up Plug-In Cars Dyson Commits $1.4 Billion for Solid-State Battery Development McLaren secures Formula E battery contract
Wanxiang is playing to win, even if it takes generations
Henrik Fisker is using a revolutionary new battery to power his Tesla killer
Here are the competing storage batteries…
AES Mitsubishi NEC Hitachi ABB
Saft EnerSys GS Yuasa
SOLARWATT Daimler Schneider Electric sonnenBatterie Kokam
Nissan – Eaton Tesvolt Aquion Energy Kreisel Leclanche
Lockheed Martin Alevo
EOS Energy Storage UniEnergy Technologies electrIQ
Green Charge Networks Imergy Power Exergonix
Simpliphi Power redT Energy Storage
Here are the competing autonomous vehicles…
(Note: at least two Tesla autopilot-related deaths have been reported, as well as at least five additional autopilot-related crashes in which most of the Teslas were totaled although the passengers survived.)
2017 Audi A8 to feature first fully autonomous tech Mercedes-Benz announces plans to develop luxury driverless cars Volvo plans to offer fully self-driving car to luxury buyers
Volvo, Uber to Jointly Develop Autonomous Sport-Utility Vehicles BMW to develop driverless car technology with Intel, Mobileye
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
Toyota Bets Big On Autonomous Tech, Swallows Millimeter Radar Maker
Second Generation Automated Acura RLX Development Vehicle Revealed in California
Bosch: We’ll Have Fully Autonomous, Connected Vehicles In Four Years
Alphabet Creating Stand-Alone Self-Driving Car Business
Google Self-Driving Car Project and FCA Announce First-of-its-kind Collaboration Hyundai says it’s discussing partnerships with Google
Jaguar Land Rover to start UK tests of self-driving car technology Delphi, Mobileye Join Forces to Develop Self-Drive System Continental AG Working on Self-Driving Partnerships
Apple Said to Develop Car Operating System in BlackBerry Country
Faraday Future is working on a maps engine for self-driving cars, hires top maps expert from Apple Samsung says autonomous driving key to its car components push
Panasonic to make push into autonomous tech
Mitsubishi Electric Adapts Missile Guidance Systems for Self-Driving Cars
Chip-Maker Nvidia Teams Up With Baidu to Develop an Artificially Intelligent, Self-Driving Car
NextEV Issued Autonomous Vehicle Testing Permit in California France rolls out ‘world’s first’ driverless buses
Local Motors Debuts First Self-driving Vehicle to Tap the Power of IBM Watson Drive.ai Brings Deep Learning to Self-Driving Cars
And here are the competing charging stations…
Ultra-fast 350 kW chargers to be deployed in Europe in partnership with Audi, BMW & others Porsche is building a fast charging network for its electric car
The White House Offers $4.5 Billion in Loan Guarantees for EV Charging Innovation Volkswagen pays $2 billion to fund clean cars infrastructure
BMW and Volkswagen Take on Tesla Motors With a New U.S. Fast-Charging Network Fastned Readies For 150 kW, 300 kW Charging
Switzerland getting new fast-charging network: 150kW chargers at 100 sites
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
How Tesla and Elon Musk Exaggeraged Safety Claims About Autopilot and Cars When Is Enough Enough With Elon Musk?
Musk Talked Merger With SolarCity CEO Before Tesla Stock Sale Debunking The Tesla Mythology
Tesla Continues To Mislead Consumers
Tesla Misses The Point With Fortune Autopilot Story
Tesla Timeline Shows Musk’s Morality Is Highly Convenient
Tesla Scares Customers With Worthless NDAs, The Daily Kanban Talks To Lawyers Tesla: Contrary To The Official Story, Elon Musk Is Selling To Keep Cash
Tesla: O, What A Tangled Web We Weave When First We Practice To Deceive I Put 20 Refundable Deposits On The Tesla Model 3
Tesla’s Financial Shenanigans Tesla: A Failure To Communicate
Tesla Is Stiffing Nevada On The GigaFactory Can You Really Trust Tesla?
Elon Musk Appears To Have Misled Investors On Tesla’s Most Recent Conference Call
Understanding Tesla’s Potemkin Swap Station
Tesla’s Amazing Powerwall Reservations
Heck, even the management team doesn’t believe in the management team!
I’ve been arguing for a while 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. In September some survey data from UBS seemed to support this:
So when the Germans (Audi, Mercedes, Porsche and BMW) roll out their 300-mile luxury EVs in 2018/2019 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, back in June Tesla announced a “bailout buyout” of SolarCity (the shareholder vote is in November), 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 down most 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.)
As for the potential profitability of the Model 3, as noted above, in Q3 Tesla had an average GAAP loss (excluding those non-repeatable ZEV credit sales) of $4710 on every Model S/X it sold despite average revenue per unit of $86,620. 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, especially when Musk has promised to equip every car with a full suite of driver-assist hardware, whether or not the buyer pays for it to be activated? 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. And now a terrific new investigative report indicates that the Tesla factory may not even have anywhere near the Model 3 production capacity Musk claims it does.
Meanwhile Tesla’s rollout of its new Model X has been a disaster, with Consumer Reports now rating its predicted reliability “much lower than average.” In addition to its quality problems, the X’s multi- thousand-dollar premium to a comparable Model S sedan is a huge sales-limiting factor, as nearly all 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 weather) starts at $86,700 with only five seats standard. By comparison, the Porsche Cayenne starts at $59,600, the Audi Q7 at $49,950, the BMW X5 at $56,495, the Volvo XC-90 at $45,750, the Jaguar F-Pace at just $41,985 and the seven seat Mercedes GLS at $69,625, and all those vehicles average more than twice the range of the Tesla with far more flexible refueling capabilities for long trips. (All quoted prices include destination & handling charges, which typically run $995.)
Meanwhile, the heretofore revered Model S is now on the Consumer Reports “Used Cars to Avoid” list with “much worse than average reliability” (although the new models have improved to “average”). On the bright side though, Tesla owners get to make lots of new friends at their local service centers, assuming they don’t mind the month-long wait times for an appointment.
So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition and completes the SolarCity acquisition, and things will only get worse once it does. Thus this cash-burning Musk vanity project is worth vastly less than its nearly $38 billion enterprise value (assuming October’s closing TSLA price, 168 million diluted shares and $6 billion of debt after combining with SolarCity, and $1.5 billion in Q4 cash consumption) and—thanks to that debt—may eventually be worth “zero.”