Stanphyl Capital’s Mark Spiegel presentation on Tesla Motors Inc (NASDAQ:TSLA) excerpted from the hedge fund’s December 2016 letter:
Mark Spiegel’s Stanphyl Capital had a killer year up close to 31% NET YTD – see below for an excerpt on Tesla Motors Inc (NASDAQ:TSLA) from their November shareholder letter. But first… although he is known as Elon Musk’s number one enemy, Mr. Spiegel makes most of his money from killer small cap picks. His under the radar small caps which could pop just based on this piece (if we discussed it publicly) were profiled in ValueWalk’s 2nd edition of our quarterly premium newsletter. See some details followed by the Stanphyl section on Tesla Motors.
For December 2016 the fund was down approximately 2.9% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 2.0% while the Russell 2000 was up approximately 2.8%. For the full year 2016 the fund was up approximately 30.8% net while the S&P 500 was up approximately 11.9% and the Russell 2000 was up approximately 21.3%. Since inception on June 1, 2011 the fund is up approximately 126.9% net while the S&P 500 is up approximately 87.7% and the Russell 2000 is up approximately 73.2%. (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.
Despite December’s increase in Tesla’s stock price, it sure wasn’t a propitious month for subsidy queen Elon Musk as President-elect Trump appointed a short seller’s dream team to various key cabinet posts, naming friends of plants Scott Pruitt to head the EPA, Ryan Zinke as Interior Secretary, Rick Perry as Energy Secretary and the CEO of ExxonMobil (!!!) as Secretary of State. Although I’m sure if the government subsidy were big enough Musk would happily modify the Model S to run on a 392 hemi four-barrel, we remain short shares of Tesla Motors Inc. (ticker: TSLA; short basis: $225.51; December close: $213.69) as
I continue to believe that it’s the market’s biggest single-company stock bubble.
Rarely does a month go by without a blatant new deception from Elon Musk, and December was no exception. Have a look at these Tweets…
Now, remember when Tesla’s Autopilot killed a guy and Musk berated Fortune’s fine reporter Carol
Loomis’ questioning of its safety by telling her to “do the bloody math”? Putting aside the fact that Musk’s math in that incident was bloody bogus, let’s do some math ourselves regarding the claim in the above Tweets about solar-powered 350kw charging stations…
In sunny areas a highly efficient solar array generates an average of around 5 watts per square foot net over eight hours a day (assuming 9 watts peak and considerably less non-peak). This means that to run just one 350kw charger using a combination of “live” solar generation and battery storage for eight hours a day would take 350,000/5= 70,000 square feet of solar cells and to store enough power to run it the other 16 hours a day you’d need to triple that, to 210,000 square feet. Thus, if this mythical Musk
Supercharger station had just four chargers it would require approximately 840,000 square feet = 19 acres (!) of solar cells! How about THAT bloody math, Elon?
I recently asked a smart, well known hedge fund manager how so many TSLA shareholders can justify investing in a company run by a guy as deceptive as Musk (in addition to the above, see slides 136-152 from my November Robin Hood conference presentation and the long list of links on page 8 of this letter) and he provided a fascinating answer: they think Musk is the next Steve Jobs and that Jobs “acted the same way.” I think that’s a very credible theory about a belief grounded in sheer stupidity, as while even Jobs’ admirers say he could be a real jerk behind the scenes, unlike Musk I don’t recall him misleading
Apple investors by publicly spouting easily fact-checked lies about his company! (As an aside, do Tesla longs think Musk is more honest about the things they can’t fact check? That’s right, Mr. Fidelity Portfolio Manager—no one will have possibly been able to have “seen it coming.”) Also unlike Musk, Jobs strived to create massive profits while Musk could figure out how to lose money running a whorehouse in a sex- addiction clinic. Good luck investing in someone who prioritizes his phony version of “saving the world” from the window of a Gulfstream G650 over creating a business that’s actually profitable.
Another fun Tesla tidbit in December came from fanboy blog InsideEVs, which proudly reported without irony that Tesla’s Fremont factory now contains 6200 employees, which is nearly as many as the 6800 who worked there back when GM ran the factory. But here’s the thing: GM built over 400,000 cars a year with those employees while Tesla is building approximately 80,000! Perhaps now all those duped journalists reporting their own version of “fake news” regarding Tesla’s factory being unusually
automated will publish their corrections (I won’t hold my breath!) or at the very least run a quick YouTube search to learn how un-unique Tesla’s robots are.
There wasn’t much other Tesla-specific news in December (just Panasonic installing some solar cell equipment in Tesla’s Buffalo factory in exchange for a guaranteed purchase commitment), but the CES show in January should be interesting and not particularly good for Tesla. In addition to the expected introduction of several new electric cars there, Delphi and Mobileye will demonstrate an autonomous driving system available “off the shelf” within three years to any car maker (most of whom will soon have their own autonomous systems anyway), thereby further turning this capability into a commodity and rendering meaningless (except for potential liability lawsuits) whatever “head start” Tesla’s current reckless system might provide. Speaking of liability lawsuits, 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 (something the aforementioned Delphi demonstrated in early 2015). However, according to industry experts it’s unsafe to even attempt to provide full autonomy without LIDAR (laser scanners) and Tesla’s new hardware doesn’t have it. 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.” I have no doubt the lawyers are salivating!
Meanwhile, happily for us back in November Tesla shareholders approved the merger with the financial boat anchor known as SolarCity, accompanied by its nearly $3.5 billion of debt and $2 billion a year in negative free cash flow (although I expect that number to lessen as it switches from a “lease” to a “sales” model). There seems to be some question as to how much of that debt is recourse to Tesla– the merger proxy says none of it is, but yet there was this Tweet from Elon Musk:
Regardless, this was a blatant bailout by Tesla shareholders of Musk’s 22 million otherwise soon-to-be worthless SolarCity shares, but as they voted to approve it and I’m glad they did, it’s a real kumbaya moment for all of us.
Of course, the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3”; I thus urge you to read my recent Seeking Alpha article as to why that will never happen, reinforced by a Bloomberg article about how much money GM is losing on the Bolt despite having a battery cost equivalent to Tesla’s and vastly great manufacturing scale.
Meanwhile, despite Musk’s blatant denial in the Q3 conference call, Tesla discounting continues unabated. Here’s a link to a great web site showing just a small portion of the heavily discounted brand new inventory cars Tesla has available, many of which offer thousands of dollars off the sticker price in
addition to the $1000 discount referral program. In fact this December 26th screenshot showed discounts of as much as $11,200 (plus the $1000 referral credit) even on cars equipped with the latest version of
(Keep in mind that every new Tesla comes listed with 50 “delivery miles” so the fact that these cars average just 100 miles on top of that indicates that Tesla is building them expressly to have an excuse to heavily discount them, as opposed to its former claim of only discounting inventory cars by $1 a mile and 1% a month.)
Although Musk proclaims otherwise, simple math implies that Tesla will need to do yet another massive capital raise to finish the Gigafactory (which, by the way, will have no meaningful cost advantage over scores of competing factories and may be just “dumb”) and to get the Model 3 into production (not to mention to replenish 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 $1.1 billion in projected Q4 capex, and on the Q3 conference call Musk said capex will be “higher in 2017 than 2016 for sure,” I’m guessing—even with the big slug of potential additional debt Tesla added in December and the sale of some SolarCity receivables— that the company will be completely “cash free” by next fall and will thus look to raise money at least a quarter ahead of that.
Meanwhile, GM’s new Bolt EV (being delivered to customers now and Motor Trend’s 2017 “Car of the Year”) has an EPA-rated range of 238 miles, handily topping the 210-miles of the cheapest Tesla Model S (which is over $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 over 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 noted in my linked article earlier in this letter) I estimate will have to be at least $13,000 higher than the Bolt. In addition to Motor Trend’s praise of the Bolt, “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
(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…
Nissan confirms next-gen Leaf will have over 200-mile range Nissan, Renault, Mitsubishi to share electric car platform Ford to spend $4.5 billion on 13 new electrified vehicles Volvo Linking Up With LG Electronics To Develop Electric Cars 200-Mile Hyundai IONIQ Electric Coming In 2018
Here are the competing car batteries…
Here are the competing storage batteries…
And by the time the lithium ion Gigafactory is completed, will it not only be an oversized white elephant but obsolete, as “Argonne Settles On Two Most Promising Successors To Lithium Ion Battery”?
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.)
Mitsubishi Electric Adapts Missile Guidance Systems for Self-Driving Cars California gives Nvidia the go-ahead to test self-driving cars on public roads France rolls out ‘world’s first’ driverless buses
And here are the competing charging stations…
BMW, Daimler, Ford, VW, Audi & Porsche JV for 350kw Charging On Major Highways in Europe White House announces new EV corridors to accelerate deployment of charging stations Volkswagen pays $2 billion to fund clean cars infrastructure
Yet despite all that deep-pocketed competition, perhaps you want to buy shares of Tesla because you believe in its management team. Really???
I’ve argued for a while that the “Tesla love/loyalty” one reads about on the forums (“Even though my
Tesla is in the shop a lot I’ll never go back to a regular car!”) and in the latest Consumer Reports owner survey 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. A September survey 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 Tesla’s rollout of its new Model X has been a quality-plagued disaster, with Consumer Reports in November giving it an overall rating of 59 on a scale of 100—tied for worst among 16 competing vehicles in its class. 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 $88,800 with only five seats standard. By comparison, the Porsche Cayenne starts at $59,600, the Audi Q7 at $49,000, the BMW X5 at $55,500, the Volvo XC-90 at $45,750, the Jaguar F-Pace at just $41,990 and the seven seat Mercedes GLS at $68,700, and all those vehicles average more than twice the range of the Tesla with far more flexible refueling capabilities for long trips.
Also, 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
So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition, and things will only get worse once it does. Thus this cash-burning Musk vanity project is worth vastly less than its approximately $40 billion enterprise value and—thanks to that debt—may eventually be worth “zero.”