Stanphyl Capital’s Mark Spiegel presentation on Tesla Motors Inc (NASDAQ:TSLA) excerpted from the hedge fund’s January 2017 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.
We remain short shares of Tesla Motors (TSLA), which entered 2017 as the market’s biggest single-company stock bubble and in January levitated to become an even bigger bubble despite the month being fundamentally awful for it…
First in January, Tesla revealed a big miss in Q4 and full-year deliveries vs. already reduced guidance, including significantly lower sales both year-over-year and sequentially for its flagship Model S despite massive discounts on brand-new inventory cars.
Next, Tesla held a Gigafactory tour completely lacking in specific information about how its battery production costs will be significantly less than those of other battery factories. Battery production is a mostly automated, modular process with few economies of scale beyond a size much smaller than “Giga”, and in January Seeking Alpha published a terrific article about this specific to Tesla and soon Chinese producers will match or beat any price coming from the Gigafactory. Battery cells are indeed a commodity.
Next in January the CES show was a cacophony of deep-pocketed competition for Tesla in autonomous driving. Delphi and Mobileye demonstrated an autonomous system available “off the shelf” within three years to any car maker, thereby further turning this capability into a commodity and rendering meaningless (except for potential liability lawsuits) whatever “head start” Tesla’s latest reckless (because it has no LiDAR) system might provide. Then both Audi and Mercedes announced sophisticated autonomous driving partnerships with NVIDIA, as did BMW with Intel and Mobileye. Meanwhile, the head of Tesla’s program quit to start his own company (and was sued by Tesla for doing so) and was replaced by a smart ex-Apple guy whose previous job was programming iPhones, and who has already distanced himself from Musk’s claims about full (Level 5) autonomy occurring any time soon. So does anyone with a brain in his head seriously think Tesla is ahead of the rest of the industry in safe autonomy? And as everyone will have Level 4 autonomy within 3-4 years, what exactly would, say, a one-year lead on a commodity be worth anyway, especially when its possessor is unable to profitably monetize it?
Next in January we had some news about “Tesla Energy.” Remember that division’s (according to Musk in 2015) “crazy off the hook demand”? Well almost two years later it doesn’t even merit a separate line in the company’s financial statements and this month CTO Straubel admitted it won’t for years. Also in January, the sales director left and in December the “VP of Products & Programs” was gone. I’m sure things there are going GREAT!
Next in January, it was revealed that Musk’s sister company SpaceX outright lied on its web site about its profitability. But then I’ve previously documented many Musk lies regarding Tesla and it hasn’t stopped some of America’s largest mutual funds from owning its stock (or that of SpaceX). It’ll be fascinating when the class action lawyers interrogate those PMs about all the red flags that were waving right in their faces!
Next in January, all references to “global warming” were deleted from the web sites for the White House and EPA and Trump vowed to eliminate the Climate Action Plan and is reportedly pulling out of the Paris climate accord. Despite this obvious 180 degree turn against subsidy-queen Musk’s empire (controlled from either his “environmentally friendly” Gulfstream G650 or the small “carbon footprint” of five adjoining houses in Bel Air), stock-pumping sell-side analysts and a complacent media began promulgating the nonsensical assertion that Musk and Trump have developed some kind of “relationship” simply because Trump (undoubtedly as a favor to friend-in-common Peter Thiel) stuck Musk on a couple of job-creation “advisory committees.” Does anyone with a brain in his head think Trump isn’t well aware of these comments from Musk in November and isn’t one heck of a grudge-bearer? At one of those meetings you can watch Trump brush right by Musk while happily greeting pretty much everyone else in the room, and note that he explicitly didn’t invite Musk to a well-publicized meeting with the heads of all the other U.S. automakers. But again, the bottom line here is “policy” and in that regard the Trump administration has clearly rejected the “global warming phobia” that Tesla and SolarCity need to survive. Trump wants to create American manufacturing jobs by cutting environmental regulation (do Teslemmings really think that’s good for Tesla?) and slashing corporate taxes, which is great for real businesses with profits, but of zero help to a cash-burning Musk vanity project such as Tesla.
Perhaps Teslarians hope that a proposed “border adjustment tax” will block the massive wave of looming imported electric car competition, particularly from Germany. If so, don’t get your hopes too high, especially as U.S.-based German factories export much of their production, and even if German manufacturers were to pass along the $5000-$10,000 per car cost of such a tax, they’d still remain easily attainable to the same people who might otherwise have bought a Tesla. Additionally, a stronger dollar will allow the Germans to absorb much of a border adjustment tax’s cost without significantly raising prices while likely overseas retaliation against Tesla (and that same stronger dollar) will make Tesla uncompetitive in the rest of the world, thereby vastly shrinking its addressable market and destroying Musk’s plan of selling two-thirds of his cars to Europe and Asia.
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 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.
Simple math implies that Tesla will need to do yet another massive capital raise to finish the Gigafactory and get the Model 3 into production (not to mention to replenish the cash drain from the financial Giga-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. We’ll have updated
financials in February but I’m guessing that Tesla will be out of cash by this fall and will thus look to raise money at least a quarter ahead of that, perhaps even as early as mid-February after the 10-K is published.
Meanwhile, GM’s new Bolt EV (being delivered to customers now and Motor Trend’s 2017 “Car of the Year”) 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 18 months before Tesla’s so-called “mass market” Model 3 can be in true mass production (mid-to-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 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 sentence 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. (Note: these links are updated monthly.) First, here are the competing cars…
And in China…
Tesla Is Playing Catch-Up With China’s BYD in Nearly Every Business Category SAIC to spend $2.2 billion on EVs, connectivity, aftersales services Tencent-Backed Company Aims to Launch Smart-Electric Cars Before 2020 Chery Breaks Ground on $240M EV Factory in China
Here are the competing car batteries…
Here are the competing storage batteries…
AES Mitsubishi NEC Hitachi ABB
SOLARWATT Daimler Schneider Electric sonnenBatterie Kokam
Lockheed Martin Alevo
Adara Blue Planet
Tabuchi Electric Younicos Orison
Moixa Powin Energy
And by the time the lithium ion Gigafactory is completed, it will not only be an oversized white elephant but may be obsolete, as “ Argonne Settles On The Two Most Promising Successors To Lithium Ion Batteries.”
Here are the competing autonomous vehicles…
Mercedes will give Tesla’s Autopilot its first real competition this year Nvidia and Mercedes-Benz to bring an AI car to market within a year New Audi A8 to be world’s first Level 3 autonomous production car
Baidu Announces Strategic Autonomous Driving Partnership with BAIC Mitsubishi Electric Adapts Missile Guidance Systems for Self-Driving Cars California gives Nvidia the go-ahead to test self-driving cars on public roads Hitachi demonstrates vehicle with 11-function autonomous driving ECU DENSO and NEC Collaborate on Automated Driving and Manufacturing France rolls out ‘world’s first’ driverless buses
And here are the competing charging stations…
EVgo Installing First 350 kW Ultra Fast Public Charging Station In The US ChargePoint Express Plus Debuts: Offers Industry High 400 kW DC Fast Charging BMW and Volkswagen Take on Tesla Motors With a New U.S. Fast-Charging Network BMW, Nissan fund EVgo fast-charging network expansion
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. Tesla’s 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.
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 things will only get worse once it does. Thus this cash-burning Musk vanity project is worth vastly less than its approximately $45 billion enterprise value and—thanks to that debt—may eventually be worth “zero.” But hey, go ahead and buy it—look at what’s hot off the press: